Module -4

Human Resource Management in Small and Medium Enterprises

Definition of SMEs, Human Resource Management and Performance in
SMEs, The Difference in Adoption of Human Resource Management:
SMEs and Large Firms, Indian Experience, Impact of Weak Adoption of
Human Resource Management in SMEs, Factors Influencing the
Adoption of Human Resource Management Practices in SMEs, Future of
Human Resource. Management in SMEs.
Human Resource Management in the Service Sector
• Introduction, The Emergence of the Services Sector, Implications for
Human Resource, Management Function, Differences Between
Services Sector and the Manufacturing Sector, Difference in Human
Resource Management
 Definition of SMEs
According to EU recommendation 2003/361, the main factors determining
whether an enterprise is an SME are: Staff headcount and
either turnover or balance sheet.

According to Workplace Employment Relations Surveys, UK, small, medium and

large firms are those whose employees number 5-49, 50-249 and 250 and above
respectively.

In India, the small scale industries (SSIs) are defined in terms of investment
limits in plant and machinery. The definition is derived from the original
criterion used by Industries (Development and Regulation) Act, 1951 (IDRA).
 World Bank definition of MSMEs

Firm Size Employee Asset ($) Annual Sales ($)

Micro <10 <10,000 <1,00,000

Small <50 <3 Million <3 Million

Medium <300 <50 Million <15 Million

*Source: World Bank

 Micro, Small & Medium Enterprise Development Act
• In February, 2006, the Government of India introduced the MSMED Act. As per
the Act, the activities are classified into manufacturing and service category.
Nature of the Micro Enterprise Small Enterprise Medium Enterprise
Enterprise

Manufacturing Sector
Service Sector
Investment in initial Fixed Investment in initial Fixed Investment in initial Fixed
Asset (plant and machinery, Assets (plant and Assets (plant and
which excludes land and machinery, which excludes machinery, which excludes
building) does not exceed Rs. land and building) more land and building) more
2.5 million. than Rs. 2.5 million, but than Rs. 50 million , but
does not exceed Rs. 50 does not exceed Rs. 100
million. million.
Investment in equipment Investment in equipment Investment in equipment
does not exceed Rs. 1 million. exceeds Rs. 1 million , but exceeds Rs. 20 million , but
does not exceed Rs. 20 does not exceed Rs. 50
million. million.

Source: Matching Compensation strategies. Pankaj M. Madhani. SCMS Journal of Indian Management, January - March, 2012.
 Importance of SMEs
In the globalized economy, SMEs have become the new engines of growth-promoting
vigorous business climate, economic efficiency and power for economic development,
particularly in developing countries.
According to current empirical studies:
• SME‘s contribute to over 55% of GDP and over 65% of total employment in high-
income countries, over 60% of GDP and over 70% of total employment in low-income
countries and over 95% of total employment and about 70% of GDP in middle-income
countries.
SMEs are important to almost all economies in the world, but especially to those in
developing countries
The relevance of SMEs in a developing economy is on dual counts: One, its promise as
a suitable vehicle for poverty eradication programs; two, its potential for facilitating
organizational innovation and sustainable growth.
 HRM and organization performance in SME
 Schermerhorn described HRM as the “process of attracting, developing and maintaining a talented and
energetic workforce to support organizational mission, objectives, and strategies”.
 According to the resource based view of management irrespective of the firm size, employees are a
strategically important, indispensable resource to achieving an organization’s objective.
 Despite the critical role the human resource practices play in enhancing organizational efficiency,
mainstream management has focused on investing the role of HRP in larger firm’s research, ignoring
them in SME sector.
 While there has been very little research into the performance effects of HRM adoption on SMEs, a
common thread in the arguments presented in prior studies on HRM in SMEs is that as SMEs grow,
unsophisticated people management approaches become increasingly inadequate.
 Owners and managers of SMEs may come to realize the importance of formally adopting HRM systems
and the associated benefits of nurturing people’s creativity, and even the creation of competitive
advantage and growth through people.
 Connection between HRM and improved organization
performance

 Hayton reported on the positive impact of discretionary HRM practices on entrepreneurial

performance in SMEs.
 In another research finding, Welbourne and Cyr informed of the improved firm performance on
two key result areas (long-term stock prices and earnings performance) as a direct consequence
of induction of two HR executives in the top leadership level of an SME.
 An initiative in Employee counseling was reported to have considerably boosted sales, profit,
productivity, product/service improvement and cash flow in an SME
 Another research finding presented evidence that education, training and development policies
and practices in some medium-sized companies were positively linked to performance.
 Connection between HRM and improved organization
performance
 A series of positive relation between training and development plan and improved performance was
reported by Wong et al , on three dimensions

i. Management ( increased preference for employee development as against reliance on recruitment )

ii. Organization of work: improved organization of business and human resources planning ,management
team formation , formulating job descriptions and appraisals
iii. External relations: new technology adoption , better production flow ,financial control, customer care
and external image.

 HRM practices were also found to affirmative causal link with improved strategy in SMEs. Chandler and
McEvoy (2000) established in a sample of 66 small and medium-sized manufacturing organizations that use
of training and group incentives scheme contributed to the effective roll out of a total quality management
strategy.
 The Difference in adoption of HRM: SMEs and large firms
• Most studies on HRM within SMEs are based on qualitative researches. This lack of
information about human resources in SMEs is considered “problematic for theory, research
and practice”. The studies indicate relatively far lesser use of professional HRM practices in
SMEs than in larger firms. Some of the differences are:

 Koch and McGrath observed that generally larger firms had more incidences of HRM
planning and formal training, and with higher level of overall HR sophistication in
comparison with SMEs.
 Westhead and Storey found fewer probabilities for formal training for both managers
and employees in a small firm.
 In another study, based upon data obtained from 267 organizations, smaller companies
were found to have less formalized performance appraisals, less likelihood of bonuses
based on company productivity and less training than do larger companies.
The Difference in adoption of HRM: SMEs and large firms
 Larger firms were found to have more structured recruitment practices than SMEs in
another study.

 Another difference noted by Rainnie is that small firms tend to provide more power to
the managers, making the managerial rights for the right use.

 A further area in HRM where SME practices vary from the larger firms is employment
relations.
 Rain et al argue that employment relations in SMEs are characterized by ‘unwritten
customs/policy/procedure/process and the tacit understandings that arise out of the
interaction of the parties at work", with the close working proximity and mutual
dependence of employer and employee leading to informal accommodation and
flexibility.
 Indian experience: HR challenges in SMEs

• Being on a significant growth trajectory has made the sector vulnerable to a bunch of associated
people challenges:
 Intense competition, lack of clear acquisition capability including low salary, along with weak
employer brand create serious constraints for the enterprises
 Currently big businesses are making investments to relentlessly upgrade the skill and
competencies of their critical employees, by tie ups with reputed foreign universities and
engaging consultants.
 Most SMEs do not have processes to systemically track employee performance, or conduct
performance counselling for generating developmental inputs and capture employee insights for
performance improvements.
 Retaining employees at the junior level is a challenge in Indian SMEs. The junior levels mostly
comprise of employees with functional skills such as electricians, or field sales people. This class
is highly mobile and change jobs frequently and may even quit without a prior notice.
 Impact of weak adoption of HRM in SMEs
 The lack of emphasis on human resources in SMEs was one of the main reasons for business failures.

 The most difficult problem for small business was finding competent workers, then motivating them
to perform.

 Human resource efficiency and performance were the most significant reasons of any SME to be
unsuccessful.

 In India the problems of small enterprises related to HRM are -failure to attract talent, to motivate
employees and to retain key employees, due to deficient recruitment, compensation and training
practices
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 Start-ups
 Start-ups are known to evolve an informal work culture marked by distinctive dress code,
communication style and a flat organizational structure.

 HR of a start-up or an innovative small and medium enterprise (SME) differs from that of a
traditional firm

 Like other SMEs, most Start-Ups do not have a full-fledged HR department, as HR function is
considered an additional cost and never budgeted for.

 Instead they turn to outsourced or software-built services that fill the gaps.
 Trinet, Zenefits, and Justworks, for example, offer digital dashboards to onboard and keep track of
employees similar to what a traditional HR person would do in the past.
 HR challenges in Indian Start-ups

Manpower is inadequate
Funding and resources are scarce
 Plan to progress is often an uncharted territory
HR professionals need to deliver and do it right each time to ensure success.
New recruits need to have the right personality mix, skills and qualifications.
Ability to deliver beyond the expected job responsibilities.
Given below are some of the suggested actions:
i. Being Different
ii. Innovating
iii. Ensuring Employee Engagement
Factors influencing the adoption of HRM practices in SMEs

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Human Resource Management in the Service Sector

• Introduction, The Emergence of the Services Sector, Implications for

Human Resource, Management Function, Differences Between
Services Sector and the Manufacturing Sector, Difference in Human
Resource Management
 Future of HRM: HR outsourcing
 Globalization is a major factor that has opened up opportunities for every business, including SMEs
business. Most SMEs are ill equipped to compete effectively for reasons of internal resource gaps.
 Cost optimization is a major driver for HR outsourcing by a large number of SMEs. Small firms pursue
outsourcing where the HR function is relatively undeveloped.
 In medium firms finance and HR functions are largely occupied with routine transactions, and thus
offer themselves easy targets of outsourcing.
 The outsourcing of HRM processes and functions improves the ‘creditworthiness of a firm. The
organization becomes more cost-efficient, better-organized and result-oriented.
 Outsourcing enables the SMEs access high quality professional expertise and experience of senior level
consultants, without incurring any permanent cost burden.
 The risks involved are: higher cost of coordination , emergence of quality and service problems, post
contractual revenue, costs of monitoring the contractual relationships, and loss of control over critical
areas. ( Human Resources)
 Services Sectors included in the National Industrial Classification 2008
• Wholesale and retail trade; repair of motor vehicles and motorcycles
• Transportation and storage
• Accommodation and food service activities
• Information and communication
• Financial and insurance activities
• Real estate activities
• Professional, scientific and technical activities
• Administrative and support service activities
• Public administration and defence; compulsory social security
• Education
• Human health and social work activities
• Arts, entertainment and recreation
• Other service activities
• Activities of households as employers; undifferentiated goods and services producing activities of households for own use
• Activities of extraterritorial organisations and bodies
• Source: Extracted from National Industrial Classification, Central Statistical Organisation, Ministry of Statistics and Programme Implementation (MOSPI), Government of India,
2008 http://mospi.nic.in/Mospi_New/upload/nic_2008_17apr09.pdf (last accessed on May 2, 2012)
Differences between Services sector and the Manufacturing
sector

• Tangibility
• Inventory
• Customers
• Employees
• Location
Difference in HRM Practices in Services/Manufacturing sector
• The following practices would be more prevailing in service-based firms:

• Job designs that are "enriched," in that they are characterized by autonomy,
variety and interdependence;
• Client input into performance appraisals;
• Employee input into performance appraisals;
• Use of performance appraisal results to assess training needs;
• Extensive training of new employees, with emphasis on performance on their
current jobs; and
• Use of performance appraisal results in determining compensation.
 TQM in services and HRM processes

Recruitment and selection

Rely more on assessments of work ethic, personality, teamwork and co-operation and
problem-solving ability
Employee Retention
The value of the staying employee lies in the fact that his intimate knowledge of
organizational “routines” has deepened with the years spent in the organization, and in the
process the customers have also built bonds of trust and expectations
Training and development
Teamwork processes and interpersonal skills, are more relevant, especially in services, and
the employees do not seem to really apply the knowledge of statistical tools and techniques,
that they got trained in
Performance Appraisal
Combine “hard” quantifiable measures with soft qualitative standards
Normative Models of HRM in Services Sector

• The Production Line Approach.

• The New Service Management School: The Satisfaction Mirror
• The Cycle of Capability of HRM
• George Ritzer’s concept of Macdonaldization
• Du Gay: Enterprising Self
• Feminist Analyses
 The Production Line Approach
(a) Simplification of tasks
(b) Establishment of a clear division of labour
(c) The application of technology and systems as substitutes for service workers
(d) The development of tighter and more systematic control of service workers
and
(e)The reduction of discretion in service jobs.
 The New Service Management School: The satisfaction mirror

• It indicates a strong positive relationship between customer

satisfaction and staff job satisfaction within the service organization
• When the front line employees are satisfied, they in turn will render
high quality service to the customer.
• The state of worker satisfaction, which is the source of customer
satisfaction, can be achieved through a bouquet of new HR practices
which would constitute a kind of ‘cycle of capability’.
 The Cycle of Capability of HRM

• Careful selection
• High Quality Training
• Well designed support system
• Empowerment
• Teamwork
• Appropriate measurements, rewards and recognition
• Development of Service culture
 George Ritzer’s concept of Macdonaldization

• Macdonaldization has four components:

o Efficiency
o Calculability
o Predictability
o Control
George Ritzer’s concept of Macdonaldization
• Efficiency entails a managerial focus on minimizing the time required to complete
individual tasks as well as that required to complete the whole operation or process of
production and distribution.
• Calculability is a focus on quantifiable objectives (counting things) rather than
subjective ones (evaluation of quality).
• Predictability and standardization are found in repetitive and routinized production
or service delivery processes and in the consistent output of products or experiences
that are identical or close to it (predictability of the consumer experience).
• Control within McDonaldization is wielded by the management to ensure that
workers appear and act the same on a moment-to-moment and daily basis. It also
refers to the use of robots and technology to reduce or replace human employees
wherever possible.
 Du Gay: Enterprising Self
• The enterprising self concept consists of presupposition about
“human nature as entrepreneurial, i.e. as active, innovative,
creative, flexible, competitive, free, and highly self- reliant”
• Customer-centricity is embedded in the organizational structures,
practices and technologies in such a way that it seems to be relied
upon to justify all management actions.
• The worker in a service organization is required to be enterprising
and the customer also does likewise.
• The individual worker as also the customer are looking to create
their identity and find meaning.
 Feminist Analyses

• The experts of this approach argue that bureaucratic

organizations have usually a hidden gender bias and women
employees find themselves at a disadvantage as compared
to their male counterparts.
• The structures and process are built on assumptions of men.
• Therefore a need to deconstruct and analyse HRM policies
for concealed gender subtext.
 Trade Unions in Service Industry - India

• Traditional Services like Hospitals , Hotels, Government enterprises

and offices have had unions
• Employers like the House of Tatas and ITC have been public in their
tolerant view about employees organizing unions
• The new Service industries like IT, ITes have successfully remained
union free