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The International Journal of Human Resource

Management
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In search of sustained competitive advantage: the

impact of organizational culture, competitive strategy
and human resource management practices on firm
performance
Lismen L.M. Chan , Margaret A. Shaffer & Ed Snape
Published online: 17 Feb 2007.

To cite this article: Lismen L.M. Chan , Margaret A. Shaffer & Ed Snape (2004) In search of sustained competitive advantage:
the impact of organizational culture, competitive strategy and human resource management practices on firm performance,
The International Journal of Human Resource Management, 15:1, 17-35, DOI: 10.1080/0958519032000157320

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 Int. J. of Human Resource Management 15:1 February 2004 17 – 35

In search of sustained competitive

advantage: the impact of organizational
culture, competitive strategy and human
resource management practices on firm
performance
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Lismen L.M. Chan, Margaret A. Shaffer and Ed Snape

Abstract We develop and test a dynamic model of co-specialized resources for competitive
advantage. Using matched data from senior executives and human resource managers, we
test the direct and interactive effects of high-performance human resource (HPHR) practices
and organizational culture on firm performance. Although the HPHR practices were not
an important influence on performance, our findings indicate that organizational culture can
be a valuable resource for companies.

Keywords High-performance human resource practices; organizational culture;

resource-based view.

In recent years, strategy scholars have begun to look beyond industrial economics-based
notions of strategy to try to better understand how organizations sustain their competitive
advantage (Amit and Schoemaker, 1993; Barney, 1991; Mahoney and Pandian, 1992;
Wernerfelt, 1995). Resource-based view (RBV) theorists contend that competing
firms can enjoy sustained advantage due to resource heterogeneity and the imperfect
mobility of such resources (Barney, 1991, 1997). However, the RBV suffers from two
major theoretical deficiencies. One is that the RBV, like the industrial economics view,
implicitly assumes static equilibrium, without addressing the requirements for continued
success in a volatile, dynamic environment (Mahoney, 1995; Teece et al., 1997). Second,
the RBV focuses only on the difficulties and barriers in competing firms imitating,
substituting or taking away resources rather than on the complementarities or co-
specialization of resources (Amit and Schoemaker, 1993; Mueller, 1996; Powell, 1995).
To address these theoretical gaps, several researchers (Grant, 1996; Teece, 1998;
Teece et al., 1997) have suggested that sustainability of advantage can be reasonably

Lismen L.M. Chan, International Human Resources, McDonald’s Corporation, c/o McDonald’s
North Asia Division Office, 21/F NatWest Tower, Times Square, Causeway Bay, Hong Kong, PRC
(tel: þ 852 2821 8101; fax: þ 852 2527 9025; e-mail: lismenc@netvigator.com).
Margaret A. Shaffer, Department of Management, School of Business, The Hong Kong Baptist
University, Kowloon Tong, Hong Kong, PRC (tel: þ 852 3411 5214; fax: þ 852 3411 5583;
e-mail: shaffer@hkbu.edu.hk). Ed Snape, Department of Management, Faculty of Business
and Information Systems, The Hong Kong Polytechnic University, Hung Hom, Hong Kong
(tel: þ 852 2766 7386; fax: þ 852 2774 3679; e-mail: msedward@polyu.edu.hk).
The International Journal of Human Resource Management
ISSN 0958-5192 print/ISSN 1466-4399 online q 2004 Taylor & Francis Ltd
http://www.tandf.co.uk/journals
DOI: 10.1080/0958519032000157320
 18 The International Journal of Human Resource Management
anticipated if firms can satisfy two criteria. First, given the dynamic environment, they
need to be able continuously to identify, upgrade, rejuvenate and reinvent valuable
resources. Second, they need to have the ability to create an environment in
which they can be self-reinforcing and enhancing in value and strength, thus causing
sustained major cost disadvantages to imitating firms. According to Pringle and
Kroll (1997), intangible knowledge-based resources (i.e. people) are more likely to lead
to a sustainable competitive advantage when the environment is changing rapidly.
Reinforcing the importance of people-related competencies, Youndt et al. commented
that ‘In fact, numerous researchers have recently noted that people may be the ultimate
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source of sustained advantage since traditional sources related to market, financial

capital, and scale economies have been weakened by globalisation and other economic
changes’ (1996: 839).
The purpose of this study is to understand how firms sustain a competitive advantage
through the effective management of people. Drawing on strategic human resource
management and organizational culture and competitive strategy theories, we build on
the RBV (Barney, 1991, 1997) and integrate the dynamic resource and co-specialized
resource concepts into a model of firm performance. Human resource management
capabilities serve to attract, retain, motivate, develop and use human capital in a firm
(Coff, 1997; Kamoche, 1996; Mueller, 1996). Organizational culture, on the other hand,
serves to mobilize, allocate and leverage resources in achieving company goals through
values, ritual, behaviours, management systems, decision criteria, visionary planning, etc
(Barney, 1985; Lado et al., 1992; Merron, 1995). With aligned aims and purposes, these
two resources in the form of organizational capabilities are likely to reinforce each other
and enhance firm specificity. This complementary relationship is consistent with current
conceptualizations of the interactive effects of HPHR practices and competitive strategy
on firm performance (Huselid, 1995). Thus, our objectives are to (1) assess the direct link
between high performance human resource practices (HPHRP) and firm performance
and between organizational culture and firm performance, (2) examine the notion of
resource co-specialization by testing the potential interactive effects of organizational
culture and HPHRP on firm performance and (3) consider the contingent relationship
between strategy and HPHRP by evaluating the moderating effects of competitive
differentiation strategy.

Competitive advantage: dynamic and complementary resources

RBV theory sees organizations as bundles of resources (Barney, 1991; Hunt, 1997a,
1997b; Hunt and Morgan, 1995; Lado et al., 1992). It assumes that resource
heterogeneity exists among firms within a strategic group, and that such heterogeneity
can be sustainable because resources are not perfectly imitable or mobile among
organizations. The RBV identifies four required characteristics for resources to
produce sustained advantage – value, rareness, imperfect imitability and imperfect
substitutability (Barney, 1991). Barney (1997) later combined the condition of imperfect
substitutability with that of imperfect imitability and added the firm’s ability to exploit
the resource.
Most RBV theorists have implicitly assumed static equilibrium and focused only on
the sustainability of advantage due to imperfect imitability. However, the interactions
among strengths-weaknesses-opportunities-threats in the real world are not necessarily in
static equilibrium (Day and Reibstein, 1997; Drucker, 1994; Pasmore, 1994). If existing
resources are not renewed in conjunction with changing environmental conditions, the
strength of a firm’s original strategic assets may soon be nullified by the changing
 Chan et al.: In search of sustained competitive advantage 19
competitive profile (Barney, 1991). Consistent with this, our dynamic resource view
takes on the premise that, to sustain competitive advantage, a firm needs more than
a superior resource. It needs a valuable, rare and imperfectly imitable capability that can
renew and reallocate resources to achieve business goals in continuously changing
environments. In other words, sustainability of competitive advantage depends not only
on the nature of resource bundles at any one point in time, but also on a firm’s ability to
renew, reallocate, rejuvenate and redefine its resources in coping with the changing
business environment.
Co-specialization of resources can be seen as promoting imperfect imitability.
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RBV theorists argue that even if a co-specialized resource can be imitated or poached by
competing firms, the value of such a resource to the imitating/poaching firm is reduced
because of co-specialization (Chi, 1994; Peteraf, 1993; Pringle and Kroll, 1997). The risk
of losing certain resources and competitive advantage can thus be reduced. Equally,
the strategic value of co-specialized resources will be greater if they are mutually
reinforcing in effect.
The key question is – what are the dynamic and complementary resources of a firm?
According to several researchers (Pfeffer, 1998; Pringle and Kroll, 1997; Youndt et al.,
1996), one such resource is an organization’s ability to manage its human capital
effectively under volatile environmental conditions. Other resources include the firm’s
culture and strategy (Barney, 1985). Thus, we consider human capital management
capabilities, organizational culture and competitive strategy as possible direct and
indirect sources of sustained competitive advantage.

Human capital management capabilities

There are two primary streams of research on human resources as competitive advantage.
One is the human capital itself; the other is the capability of managing human capital
(Mueller, 1996; Pfeffer, 1995; Wright and McMahan, 1992). Some researchers
have proposed human capital itself as a source of sustained competitive advantage by
testing it against the RBV criteria (Wright and McMahan, 1992; Wright et al., 1994). They
emphasize that employees at all levels form the resource pool for a firm’s competitive
advantage. Many researchers, however, argue that the source of sustained advantage is the
capacity to manage human capital (Coff, 1997; Kamoche, 1996; Mueller, 1996; Pfeffer,
1995; Schuler and MacMillan, 1984; Ulrich, 1991). According to this view, it is the path-
dependent, socially complex and causally ambiguous properties of knowledge and
relationship dynamics embedded in the human capital, rather than the capital itself, that
creates a firm’s sustained advantage. This view emphasizes human cognition, knowledge
and relationship processes, and overcomes the major drawbacks of static environment –
capabilities equilibrium, matching nicely with the dynamic resource approach. Through
effective human resource practices, these processes can be renewed and developed in
response to or even ahead of environmental dynamics. Compared to financial capital, scale
economies or patents, the invisible asset of an effectively employed human resource system
is critical for enhancing and renewing a firm’s capabilities (Becker and Gerhart, 1996).
According to the dynamic resource approach, sustainable advantage comes from capabilities
that can develop, renew and upgrade the resources being managed as well as directly from
the capabilities themselves.
Strategic human resource management (SHRM) studies provide a rich pool of
typologies and theoretical support for the contribution of high-performance human
resource practices (HPHR) to performance (see Becker and Huselid, 1998, and Delery
and Shaw, 2001, for reviews). A key point in this research is that it is systems of HR
 20 The International Journal of Human Resource Management
practices, rather than individual practices themselves, which are important. The design
and implementation of internally consistent policies and practices should ensure that
a firm’s human capital contributes to the accomplishment of its goals (Huselid et al.,
1997; Wright and McMahan, 1992). There is evidence for the positive impact of
HR practices on firm performance. Huselid (1995) and Delaney and Huselid (1996)
found support for the impact of high-performance work practices (HPWP) on firm
performance. Arthur (1992, 1994) presented evidence for the relationship between the
human resource systems and the manufacturing performance of steel minimills. Recent
evidence for the effects of HRM practices on the performance of firms in different
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countries such as China (Björkman and Fan, 2002), Russia (Fey et al., 2000), Korea (Bae
and Lawler, 2000) and New Zealand (Guthrie, 2001) provides strong support for the
importance of managing human capital. Thus, we propose that human capital
management capability that focuses on development and motivation of employee
performance will consistently have a positive impact on firm performance.

Hypothesis 1: The use of high performance human resource practices (HPHRP) will
be positively related to firm performance.

Organizational culture
Organizational culture has also been considered a form of organizational capital (Barney,
1985; Camerer and Vepsalainen, 1988). As Schwartz and Davis (1981: 47) put it,
‘for better or worse, a corporate culture has a major impact on a company’s ability to
carry out objectives and plans, especially when a company is shifting its strategic
direction’. Despite such views on the influence of organizational culture on firm
performance, empirical studies are limited. With a sample of over 760 US firms, Denison
and Mishra (1995) developed and tested a four-trait culture model, consisting of
involvement, adaptability, consistency and mission. The four-trait model was captured
in a 2 £ 2 dimensional matrix: (a) external orientation versus internal integration and
(b) change and flexibility versus stability direction. The involvement trait is positioned in
the ‘internal integration’ and ‘change and flexibility’ quadrant. Involving employees
in business by encouraging their participation in decisions, processes and routines
provides them with an increased sense of ownership and responsibility. The consistency
trait is positioned in the ‘internal integration’ and ‘stability and direction’ quadrant.
Companies demonstrating a consistency trait usually have a high level of agreement on
the way they work and their approach in doing business is consistent and predictable.
Both the adaptability and mission traits emphasize ‘external orientation’. Adaptability is
also in the ‘change and flexibility’ quadrant, reflecting responsiveness and readiness to
change in response to the changing external environment. Finally, the mission trait
emphasizes the stability and purpose of an organization, and is positioned in
the ‘external orientation’ and ‘stability and direction’ quadrant of the matrix.
It characterizes the company’s direction and stability as driven by external forces and
interests. Using subjective firm performance measures, including quality, employee
satisfaction and overall firm performance, Denison and Mishra (1995) found support for
the effects of each of these four dimensions of organizational culture on firm
performance.
Researchers generally agree that culture is extremely difficult to imitate or duplicate
(Fitzgerald, 1988; Mueller, 1996), due to its inherent tacitness, complexity and
specificity (Barley, 1983; Gregory, 1983; Lippman and Rumelt, 1982; Meek, 1988;
 Chan et al.: In search of sustained competitive advantage 21
Reed and DeFillippi, 1990). Barney (1985) described organizational culture as valuable,
rare and imperfectly imitable; thus, it has high potential for creating sustainable
advantage. We therefore believe that a valuable organizational culture can have a direct
impact on sustaining above-normal performance. Thus, we propose:

Hypothesis 2: Organizational culture will be positively related to firm

performance.
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Co-specialized resources: organizational culture and HPHR practices

Organizational culture and HPHR practices are potential co-specialized resources that
may serve the need for dynamic capabilities. Although human capital is important, the
driver for sustained superior performance is a combination of human capital management
capabilities and an appropriate culture. Together, these two capabilities give firms
the needed self-renewal capabilities to invest, upgrade, re-allocate and rejuvenate their
resources and the capabilities themselves. It takes time and investment to develop
such resources or capabilities, which may explain the failure to achieve sustained
competitive advantage by firms focusing primarily on short-term profits.
As we discussed earlier, each of these two capabilities is a resource in terms of its
value, rareness and imperfect imitability (Barney, 1997). Despite the controversy over
the imitability of HPHRP, researchers generally agree that a supportive organizational
culture is needed for human resource practices to result in advantage-creating
capabilities. Through rituals, heroes, routines and managerial values, organizational
culture directly and indirectly influences investment and resource allocation decisions
(Deal and Kennedy, 1982; Merron, 1995). Thus, without the support of a necessary
culture, HPHR practices will not function to their fullest performance potential.
What is the ‘necessary’ culture? It is a culture that offers direction for employees to
develop their skills and learn new innovations, clear guidance for allocating firm resources
for competing for the future (Hamel and Prahalad, 1994), a strong sense of need for
creativity, positive and proactive attitudes toward changes and commitment to work with a
high degree of flexibility (Denison and Mishra, 1995; Kotter and Heskett, 1992). A culture
that enhances a firm’s ability to retain its well-developed and motivated human capital is
equally important (Sheridan, 1992). These dimensions of organizational culture will not
only facilitate a firm’s superior performance, but they will also strengthen the impact of
HPHR practices on firm performance. This idea of co-specialized resources in the form of
human resource practices and a necessary organizational culture is not entirely new. Powell
(1995) stressed the need for a culture to support beyond just the superficial practices.
The dynamic nature of these co-specialized resources is also evident in the ability of
HPHR practices to reinforce the effect of the necessary culture. As Huselid summarized,
these performance-enhancing practices serve ‘to enhance employees’ knowledge, skills,
and abilities which would then provide a mechanism through which employees can use
those attributes in performing their roles’ (1995: 645). Through these practices, firms
develop employees’ competencies as well as their commitment towards their employers
(Campbell and Tawadey, 1990; Dessler, 1993). Thus, the relationship between
organizational culture and HPHR practices is a reinforcing spiral that sustains and even
strengthens a firm’s competitive advantage.
To clarify the interplay between organizational culture and HPHR practices, we
consider how each of the four cultural traits (i.e. involvement, consistency, adaptability
and mission) interacts with the others to influence firm performance. An organizational
 22 The International Journal of Human Resource Management
culture that encourages employee involvement complements a firm’s efforts in
promoting HR practices of two-way communication with employees and various
employee participation programmes (Dessler, 1994). Failure of employee communica-
tion programmes is commonly attributed to the lack of genuine intent to solicit and
incorporate employees’ views in business decisions. Performance appraisals supported
by a culture that encourages involvement enhance employee job and organizational
commitment. Appraisals openly discussed between superiors and subordinates will not
only build a sense of ownership in both parties but also enhance subordinates’
performance (Dessler, 1994).
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High-performance work practices need a reasonable degree of consistency over a

sustained period of time before they can deliver good business results (Huselid, 1995).
With consistent practices in the areas of skill development, employee communication
and involvement, and internal career opportunity, both employer and employees can
enjoy an environment more conducive to performance. Consistency is often the critical
success factor of appraisal systems. Effectively implemented, performance reviews can
strengthen the supervisor – subordinate relationship and promote commitment to
performance management (Dessler, 1994).
Firms with a high degree of adaptability are responsive to environmental
conditions and change internally to maximize benefits from environmental changes
(Denison and Mishra, 1995). Such firms need to detect environmental signals
accurately and translate such signals effectively into organizational adjustments to
best exploit opportunities and minimize the negative impact of threats. These
companies are therefore more willing to try innovative approaches in better meeting
their employees’ needs. HR practices that emphasize company information sharing,
participative management and formal grievance procedures will help to facilitate the
needed internal change initiatives (French and Bell, 1990; Robbins, 1998).
Furthermore, to be really adaptive, skill development becomes critical to adjust to
changing business demand. While appraisal systems have to be applied consistently
to attain effective business performance, the context of appraisal needs to be
adaptive. Appraisal systems that impose rigid performance expectations can turn into
a barrier to aligned expectation and delivery of performance. Perceived flexibility and
fairness in performance management systems will result in better-motivated
employees and improved business outcomes.
Many scholars have stressed the importance of integrating a sense of mission with
HR practices (Campbell and Tawadey, 1990; Dessler, 1993; Pfeffer, 1998). Such an
alignment will better facilitate their resources and investment for sustainable health
and growth. Skill training and management development programmes, which are
set up with thorough consideration of alignment with business mission, will
improve the effectiveness of such programmes and, consequently, their business
impact. Employee communication and participation programmes in companies with a
strong mission trait are also likely to focus well beyond administrative programme
routines. Incentive programmes that are designed to encourage long-term business
interest among employees will enhance the positive implications of such programmes
(Dessler, 1994). Performance appraisals that are designed and integrated with a firm’s
mission and purpose provide a better balance in management efforts for both short-
term survival and long-term health. Based on this discussion, we propose the
following

Hypothesis 3: Organizational culture will positively moderate the impact of high

performance human resource practices on firm performance.
 Chan et al.: In search of sustained competitive advantage 23
Contingent relationship: competitive strategy and HPHR practices
According to the contingency approach, an organization’s strategy moderates the effect
of human resource practices on firm performance (Hitt et al., 2001; Huselid, 1995;
Schuler and Jackson, 1987). The core of this approach is the concept of fit or the
integration of a firm’s strategy and its internally consistent pattern of human resource
practices to form an employment system. Most attempts to investigate these relationships
have focused on a firm’s competitive strategies (e.g. Arthur, 1992; Lee and Miller, 1999;
Schuler and Jackson, 1987). According to Porter (1985), firms compete on the basis
of two generic strategies: differentiation and cost leadership. Firms with a differentiation
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strategy put their emphasis on the firm’s recognition of and value towards customer
needs. Those adopting a cost leadership strategy focus on their cost structure in
competing with other firms in the industry or segmented targets.
The effect of the complementary relationship between competitive strategy and HR
practices on firm performance is consistent with value-chain theory (Porter, 1985), which
highlighted the importance of human resource management in supporting a firm’s
delivery of value and profit margin. To maximize its impact, a cost leadership strategy
needs to be supported by a control-oriented human resource management approach.
This type of HR system is typified by practices of minimal employee training
and development, narrowly designed jobs, rigid and clear job descriptions and is
short-term results oriented (Arthur, 1994; Schuler and Jackson, 1987). On the other hand,
a commitment-oriented human resource management system will better match
the competitive needs of firms employing a differentiation strategy. Commitment
HR systems normally are characterized in terms of high employee involvement and
participation, training in group problem solving and socializing activities (Arthur, 1994).
Because our focus is on high-performance human resource practices, we limit our
investigation to one competitive strategy-differentiation. Our argument is that high-
performance human resource practices contribute more to performance where the firm
pursues a differentiation strategy, because such HR practices are especially valuable in
implementing a differentiation strategy. Thus, we propose

Hypothesis 4: The extent to which the firm emphasizes a differentiation strategy will
positively moderate the relationship between high-performance
human resource practices and firm performance.

Method
Data collection
This is a firm-level field study targeting companies representing multiple industries in
Hong Kong. In the late 1990s, companies in Hong Kong were hard hit by severe market
volatility. The handover of the sovereignty of Hong Kong in July 1997 and the ensuing
Asian economic crisis in the same year jointly created an unfavourable operating
environment in Hong Kong. The collapse of the property market in 1997 had major
domino effects on other industries – in particular, the financial business and consumer
retail sectors (Leung, 1998). Such a volatile and changing business environment is a
good testing field for our dynamic RBV approach to people as a source of sustained
competitive advantage.
To develop our sampling frame, we used two annually updated company databases
from Dun and Bradstreet in Hong Kong – ‘Top 2000 Major Foreign Enterprises in
Hong Kong (January 1999)’ and ‘Major Hong Kong Companies in Hong Kong
 24 The International Journal of Human Resource Management
(August 1998)’. Using the pre-set criteria of employee size (companies with 100 or more
employees), we identified and mailed surveys to 1422 Hong Kong and foreign companies
in Hong Kong. We sent each firm two questionnaires, one for a senior executive and one
for the human resource manager. The questionnaires were coded for matching purposes.
The senior executive questionnaire contained questions about firm performance. The
questionnaire for human resource managers covered the constructs of human resource
practices and organizational culture. By collecting dependent and independent measures
from two sources, we avoided the problems often associated with common method
variance. A section on company background was included in both questionnaires to help
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us identifying any major confounding factors and to confirm matching.

We received forty-nine sets of matched responses, plus an additional twenty-six
unpaired responses from the senior executives and seven unpaired responses from the
human resource managers, representing a total of eighty-two companies. We also
received six formal letters declining participation and twenty-seven undelivered surveys
were returned. Although this sampling approach resulted in a low response rate, we
believe that the firms participating in this study are more representative of MNCs than if
we had used a convenience sample. Analyses comparing firm characteristics indicated
that the firms were representative of those surveyed; thus, we found no evidence for non-
response bias.

Measures
Firm performance was assessed with the eleven-item measure developed by Delaney and
Huselid (1996). Senior executives were asked to assess various performance indicators,
such as their product or service quality, marketing, profitability, employee relations, etc.,
by comparing their firm with similar companies in Hong Kong. Responses were on a 1
(much worse) to 5 (much better) scale. Our factor analysis (using PROMAX rotation)
resulted in a two-factor structure that was similar but not identical to the findings of
Delaney and Huselid (1996). The two factors are labelled as ‘perceived organizational
performance’ (a ¼ .79) and ‘perceived market performance’ (a ¼ .88).
High-performance human resource (HPHR) practices were measured with a scale
based on items developed by Huselid (1995). We modified these items slightly to better
reflect the human resource characteristics of Hong Kong and to align the measurement
towards the development-based and performance-enhancement features of the
independent variable. For most items, human resource managers were asked to report
the percentages of general staff who were covered by the human resource practices listed.
The response format for three other questions (training hours, promotional criteria and
qualified applicants for job vacancy) involved specific choices or numbers.
Factor analysis using PROMAX rotation resulted in two factors similar to Huselid’s
scales (1995). The two factors were labelled as ‘employee skills and organizational
structure’ (a ¼ .68) and ‘employee motivation and communication’ (a ¼ .72).
Our measure thus reflects an HRM systems approach, rather than focusing on individual
HR policies or practices.
Organizational culture was measured with twenty-one items based on the four
cultural subscales developed by Denison and Mishra (1995). To enhance the reliabilities
of these scales, we added several items to each. A factor analysis using PROMAX
rotation resulted in a five-factor structure. In addition to the four traits described by
Denison and Mishra (1995), a fifth trait, which we labelled ‘member conformity’
emerged. This dimension refers to conformance or compliance by employees to policies
and/or values whereas the dimension of policy consistency stresses the existence of
 Chan et al.: In search of sustained competitive advantage 25
consistent policies, systems or procedures in the company. The Cronbach’s alphas for
involvement, member conformity, policy consistency, adaptability and mission are,
respectively, 0.84, 0.75, 0.55, 0.81 and 0.85.
Differentiation strategy was operationalized with twelve items from Nayyar (1993).
Respondents indicated the extent to which their firm emphasized items such as ‘premium
product/service quality’ and ‘marketing innovation’. Scale anchors were 1 ¼ no
emphasis to 5 ¼ major emphasis. An exploratory factor analysis of these items resulted
in two factors: product differentiation (eight items) and marketing differentiation
(four items). Cronbach alphas were .75 for product differentiation strategy and .72 for
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marketing differentiation strategy.

The control variable of employment size was measured by asking respondents to
report the number of employees worldwide.

Results
Table 1 presents the means, standard deviations, zero-order correlations and Cronbach’s
alphas. Responses to the HPHR practices were on different scales, so we standardized
these to z-scores before conducting our analyses. All other items were centred. To test our
hypotheses, we used correlation (see Table 2) and multiple (moderator) regression (see
Tables 3 and 4) analyses.
Hypothesis 1 predicted that HPHR practices would be positively related to firm
performance. Neither the correlations nor the regression analyses showed a significant
relationship between HPHR practices and performance. Thus, hypothesis 1 was not
supported.
As predicted by hypothesis 2, several of the culture dimensions were related to firm
performance. Involvement, policy consistency and adaptability were significantly and
positively correlated (r . .44, p , .01) with organizational performance. Similarly,
the mission trait was correlated with organizational performance (r ¼ .31, p , .05).
Only the adaptability and mission traits were positively correlated (r . .32, p , .05)
with market performance. Although none of the culture traits emerged as significant
predictors of firm performance in the regression analyses, as a block they did influence
organizational performance. Thus, we found partial support for hypothesis 2.
To test the interactive effects of HPHR practices and organizational culture on firm
performance (hypothesis 3), we first created interaction terms by multiplying each
dimension of culture by each dimension of HPHR practices. We then entered these into
the equations after entering the control variables and the main effects. To enhance the
power of the statistical analyses, given the relatively small sample size, each of the five
cultural traits was tested in separate regression models. Contrary to our predictions, we
found a negative moderating effect for three interaction terms: involvement
organizational culture £ the motivation and communication dimension of HPHR
practices and both organizational and market performance and mission organizational
culture £ the motivation and communication dimension of HPHR practices on market
performance. These results indicate that certain dimensions of organizational culture and
HPHR practices do interact to impact on firm performance. None of the other moderators
was significant. Insofar as our significant findings were in the opposite direction to that
hypothesized, hypothesis 3 was not supported.
To test the moderating effects of differentiation strategy on the relationship between
HPHR practices and firm performance, we followed the same procedures and analyses
described above. None of the interactions were significant, thus refuting hypothesis 4.
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Table 1 Descriptive statistics and correlations

Constructs Mean SD 1 2 3 4 5 6 7 8 9 10 11
1 Organizational performance 2.92 1.89 (.60)
2 Market performance 2.84 3.68 .52* (.84)
3 HR practices (motivation) 0.00 3.40 .10 .22 (.71)
4 HR practices (skills/structure) 0.00 4.14 .26† .17 .34* (.69)
5 Involvement culture 1.06 3.23 .49** .22 .27† .26† (.84)
6 Member conformity culture 2.29 1.50 .07 2.03 .27† 2.09 .13 (.75)
7 Policy consistency culture 0.65 1.55 .44** .14 2 .02 .25† .35* .18 (.55)
8 Adaptability culture 1.69 3.11 .49** .33* .31* .28† .68** .15 .50** (.81)
9 Mission culture 2.89 3.56 .31* .32* .33* .40** .41** .12 .52** .40** (.85)
10 Product differentiation strategy 7.72 4.15 .33* .08 2 .03 .26† .05 .06 .24 .15 .22 (.74)
11 Marketing differentiation strategy 1.05 3.14 .04 2.05 .14 .35* .19 .08 .23 .27† .19 .25† (.72)
12 Organizational size (employees) 27,757 49,003 2.03 .05 .22 .43** 2.04 .24† .04 2 .01 .27† .32* .32*

Notes
N ranges from 48 to 49, with a median of 49.
All Likert scaled items are centred by deducting 3 from the raw scores.
26 The International Journal of Human Resource Management

All HRP scales are standardized to z-scores.

Cronbach’s coefficient alphas for matched sample are in parentheses on the diagonal.
†
p , .10; *p , .05; **p , .01.
 Chan et al.: In search of sustained competitive advantage 27

Table 2 Results of regression analyses for culture and HR practices on performance

Predictors Organizational performance Market performance
Control variable
Organizational size (employee) 2.08 2.02

Culture variables
Involvement .27 2.07
Member conformity .02 2.09
Policy consistency .23 2.12
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Adaptability .17 .31

Mission 2.02 .29

HR practice variables
Motivation/communication 2.05 .08
Skills/organizational structure .15 2.01

F (full model) 2.69* 1.09

R-square .35 .18
Adjusted R-square .22 .01
Degrees of freedom 8, 40 8, 40

F for block of culture variables 3.15* 1.15

F for block of HR practice variables 0.39 0.09

Notes
†
p , .10; *p , .05; **p , .01.

Discussion

High-performance human resource (HPHR) practices as a resource

The research findings from our multi-industry sample do not lend much support to the
expected direct effect of HPHRP on firm performance. This is inconsistent with prior
research and literature (Arthur, 1994; Doty et al., 1993; Huselid, 1995; Pfeffer, 1998).
Among many possible reasons for the unexpected findings, those related to the general
human resource environment and the typical role of human resource management for
companies in Hong Kong are particularly relevant.
Companies in Hong Kong tend to focus on short-term results. This has shaped the
unique characteristics of the human resource market in Hong Kong, with employees
often showing limited long-term loyalty towards their employer. This is incompatible
with employers’ making significant long-term investments in human capital. The short-
term result-driven business environment also explains the rather non-strategic role of the
majority of human resource management practices in companies in Hong Kong. In more
developed countries, such as the US, human resource management has developed into
a discipline and human resource practices are often aligned with business needs.
The measurement of HPHR practices in countries where human resource management is
less mature may need to go beyond just assessing the availability of practices
and evaluate the context of such practices (e.g. the effectiveness of their application).
The simple but critical reality is that the existence of certain practices (as captured in the
measurement employed by this research) in Hong Kong companies may offer little
indication as to whether they have actually been effectively implemented.
 28 The International Journal of Human Resource Management

Table 3 Results of regression analyses for moderating effects of culture and HR practices on
performance
Involvement Mission

Predictors Organizational Market Organizational Market

performance performance performance performance
Control variable
Organizational size 2.11 2.06 2.20 2 .07
(employee)
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Culture variables
Involvement .38* 2.03
Mission .25 .23

HR practice variables
Motivation/communication 2.12 .06 .02 .23
Employee skills and .24 .27 .26 .11
orgn structure

Moderating effects
Involvement £ motivation 2.27† 2.30†
Involvement £ skills 2.01 2.26
Mission £ motivation 2.15 2 .33†
Mission £ skills 2.00 2 .04

F (full model) 3.61** 2.35* 1.45 2.05†

R-square .34 .25 .17 .23
Adjusted R-square .25 .14 .05 .12
Degrees of freedom 6, 42 6, 42 6, 42 6, 42

Notes
†
p , .10; *p , .05; **p , .01.

Organizational culture as a resource

Deviating slightly from Denison and Mishra (1995), we found a five-factor structure of
organizational culture. The involvement, adaptability and mission traits formed separate
cultural dimensions as expected, but the consistency trait split into two factors that we
labelled ‘member conformity’ and ‘policy consistency’. Although regression analyses
did not support our hypotheses, the correlation analyses suggest that there are
positive and significant relationships between (a) involvement, policy consistency,
adaptability and mission traits and organizational performance and (b) adaptability and
mission traits and market performance. These findings may appear, on the face of it,
contradictory and inconsistent. However, there is a possibility that the five traits of
organizational culture have inherent inter-dependence and counteract each other’s
impact on firm performance (Denison and Mishra, 1995). We encourage future
researchers to consider this possibility.
Except for member conformity, all organizational culture traits demonstrated
significant and positive correlations with organizational performance. The lack of
empirical support for the effects of the member conformity trait can be understood in
conjunction with the society and business culture at large in Hong Kong. The influence
 Chan et al.: In search of sustained competitive advantage 29

Table 4 Results of regression analyses for moderating effects of strategy and HR practices on
performance
Product differentiation Marketing differentiation

Predictors Organizational Market Organizational Market

performance performance performance performance
Control variable
Organizational size 2 .34* 2.04 2.18 2 .07
(employee)
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HR practice variables
Motivation/communication 2 .10 2.05 2.02 .17
Employee skills and .32 .55 .51* .08
org. structure

Competitive strategy variables

Product differentiation .34* .02
Marketing differentiation 2.08 2 .19

Moderating effects
Motivation £ product .27 0.33
differentiation
Motivation £ marketing 2.22 2 .16
differentiation
Skills £ product 2 .03 2.53
differentiation
Skills £ marketing 2.12 .18
differentiation

F (full model) 2.41* 0.92 1.67 0.76

R-square .26 .12 .20 0.10
Adjusted R-square .15 2.01 .08 2 .03
Degrees of freedom 6, 41 6, 41 6, 41 6, 41

Notes
†
p , .10; *p , .05; **p , .01.

of Confucianism remains significant, even though Hong Kong has been intensely
affected by Western culture in the past few decades (Kristof and Wudunn, 1994: 319).
With a strong emphasis on harmonious relationships and hierarchy, Confucian thinking
does not see individualism in the same light as does the Western world (Lau and Kuan,
1991). This reflects, on a broad scale, the influence of national culture on our daily
business life, thus explaining the general expectation of member conformity. The lack of
variation in member conformity among survey respondents may have reduced its
predictive power on firm performance.
Typical companies in Hong Kong are not very strong in encouraging participation of
organizational members in business decisions affecting them. As evidenced from the
responses of the human resource managers sampled, on average less than 16 per cent
of employees participate in QWL, QC or labour-management participation teams.
In contrast, 70 per cent of employees were reported to be in formal information-sharing
programmes and to have access to formal grievance procedures. These statistics
 30 The International Journal of Human Resource Management
reinforce the fact that companies in Hong Kong tend to adopt a one-way, reactive, fire-
fighting mode of employee communication. The significant relationships between the
mission and involvement traits and organizational performance in Hong Kong suggest
that companies with high levels of employee involvement can expect above-normal
performance.
The policy consistency trait and adaptability traits also significantly correlated with
organizational performance. Firms with a high level of policy consistency may enhance
internal integration and stability for business processes and approaches, which are
essential for organizational performance. Meanwhile, the ability to scan environmental
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signals effectively and translate such information into internal system changes
characterizes the adaptability trait. This enhances organizational performance by being
responsive in meeting stakeholders’ and customers’ needs and ensuring appropriateness
of activities in coping with environmental change.
Both the adaptability trait and mission trait have an external orientation. The former
emphasizes flexibility whereas the latter caters for stability. This may explain the
significant relationships of these two traits with market performance. Other culture
traits – involvement, member conformity and policy consistency – did not influence
market performance. They tend to be more internally focused, thus they are likely to have
a more direct impact on organizational than market performance.

Co-specialized resources: organizational culture and human resource practices

Our findings partially support our contention that the co-specialized resources of HPHR
practices and organizational culture affect firm performance. The significant negative
moderating effect of the involvement trait on the links between the motivation and
communication dimension of HPHRP and organizational and market performance
suggests possible clashes between a high involvement culture and the motivation and
communication practices for companies in Hong Kong. Although it is logical to conclude
statistically that these two organizational capabilities are not mutually complementary,
the lack of face validity for such a negative moderating effect cautions us from making
a pre-mature judgement and thus rejecting any possible co-specialization properties.
The negative moderating effect of organizational culture can be readily explained by a
business argument in relation to the characteristics of human resource management in
Hong Kong.
As discussed earlier, a high score for the construct of HPHR practices may reflect only
the availability and breadth of such practices with little or no relation to the content or
effectiveness of such practices. This may contribute to the negative moderating effect of
the involvement trait of organizational culture on the HPHR practices and firm
performance links. Employees having a higher degree of involvement will tend to have
higher expectations of their firm’s management, especially with respect to human
resource practices. They will tend to be more vulnerable to disappointment or frustration
if their company’s human resource practices are not up to their expectations.
The findings also support a negative moderating effect of the mission trait on the
link between the motivation and communication dimension of HPHR practices
and market performance. This may also be attributed to the cost-driven management
focus of companies in Hong Kong. Similar to the case of possible clashes between
the involvement trait and the motivation and communication dimension of HPHR
practices, employees who have a long-term orientation and value stability will probably
be frustrated by short-term management efforts. Inconsistency between a company’s
long-term direction and management practices will not only create frustration among
 Chan et al.: In search of sustained competitive advantage 31
employees at all levels, but also alignment of management efforts and resource allocation
will also be compromised. This may explain the lack of interaction between the mission
trait and the motivation and communication dimension of HPHR practices and
organizational performance. On the other hand, the negative moderating effect on market
performance may be driven by the mission trait, which has a strong focus on the external
operating environment.
A common theme among these three sets of moderating effects is that they all involve
the employee motivation and communication dimension of HPHR practices.
This dimension consists of performance appraisal and formal communication practices.
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To the extent that these practices are implemented in Hong Kong with short-term result
expectations and little employee participation, the negative moderating effect of such
practices is perhaps not surprising.

Contingent relationship: competitive strategy and HPHR practices

Despite strong theoretical support for a contingent relationship between competitive
strategy and HPHR practices, existing empirical studies offer only limited support
(e.g. Huselid, 1995). Similarly, our findings are non-supportive, suggesting that the
relationship between a firm’s strategy and its HR practices may be more complex than
originally posited. A possible explanation for our findings, however, is that we
included only one type of competitive strategy in our analyses. Had we also tested the
cost-leadership strategy, we may have detected stronger relationships with the HPHR
practices of Hong Kong firms. Thus, we encourage future researchers to examine more
discrete forms of competitive strategy in the future.

Limitations and future research

The underlying premise of our proposed dynamic resource model is the sustainability of
advantage for firms having both desired human resource practices and the necessary
culture. It would have been more desirable to establish cause-and-effect relationships
with a longitudinal research design. This, however, does not undermine the value of
cross-sectional research. If we can obtain empirical support for the links among these
variables and have strong theoretical arguments that human resource practices and
organizational culture are valuable, rare, inimitable or unsubstitutable and self-renewable
in strength and form, under the notion of RBV, sustainability of competitive advantage
can be logically and reasonably anticipated.
Faced with the dilemma of choosing between objective and subjective performance
parameters, we gave detailed consideration to the range of practicality and validity
concerns. We finally decided to adopt perceptual measures for firm performance.
Although these may introduce limitations due to measurement error, they are often
superior in assessing long-term performance. Another measurement issue involves data
collection. We used proxy measures provided by senior executives and human resource
managers to represent the firm. Such an approach has been commonly employed
(Denison and Mishra, 1995; Powell, 1992), but it may still be subject to validity
limitations. However, we did collect data from two sources, thus having a better
representation of the firm and avoiding problems associated with common method
variance, although this approach resulted in a lower response rate and a relatively small
sample. Clearly, there are trade-offs here. We are confident that our sample is more
representative of the population than a convenience sample would be, although we
recognize that external validity is still a concern.
 32 The International Journal of Human Resource Management
Based on our research findings, more work is needed in the conceptualization and
measurement of multi-dimensional culture traits. In particular, the possible curvilinearity
of the organizational culture traits, as revealed by the joint findings of the correlation and
regression analyses, deserves further exploration. Future studies in this area will help us
to better understand and develop the trait theory of organizational culture as a firm
resource for sustained competitive advantage.
Our findings contradict an established body of research on the impact of human
resource practices on firm performance (Arthur, 1994; Delaney and Huselid, 1996;
Doty et al., 1993; Huselid, 1995; Pfeffer, 1998). We encourage future research to focus
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on enhancing the measurement of human resource practices and to consider possible

mediating effects, such as employee morale (e.g. Vandenberg et al., 1999). Studies on the
strategic role of the human resource function in Hong Kong may also be useful to verify
our explanation of a lack of significant direct links between human resource practices and
firm performance.

Conclusion
In this research, we proposed and tested a dynamic model of co-specialized resources
that predicts the direct and interacting effects of HPHR practices and organizational
culture on firm performance. It goes beyond the ‘either-or’ and static equilibrium mindset
by identifying the dynamic and co-specialized resources needed proactively to anticipate
and respond to environmental changes. The model has both theoretical and practical
implications for the studies of SHRM, organizational culture and organization
development. It is a comprehensive study that has effectively integrated industrial
economics and organizational theories. A firm-level study of MNCs in a foreign context
is rare but important. As a result, our findings may have major implications for
organizations.

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