Impact of HR Practices on Organizational Performance in India:

A study of small manufacturing units in Panchkula

1. Introduction

Impact of human resource management practices on organizational performance has been a widely
researched area for years. Results of studies, from developed countries to developing countries,
have been time and again showing that HR practices have significant impact on organizational
performance (Delaney & Huselid, 1996; Katou & Budhwar, 2007; Sing, 2004; Tzafrir, 2006; Mir
Mohammed Nurul Absar et al., 2010). But unfortunately, very insufficient number of studies have
been conducted in this area in context of Panchkula region in India. To augment the contemporary
knowledge base of HR practices of small manufacturing units in developing countries like India, this
study has been undertaken.

2. Review of Literature (ROL)

Sangeeta Trehan and Karan Setia (2014), in their research entitled Human Resource Management
Practices and Organizational Performance: An Indian Perspective give a better understanding of the
role of human resource practices in creating and sustaining organizational performance, specifically
in the Indian context.

Som (2008) studied the role of innovative HRM practices and their impact on enhanced corporate
performance during the change process. The results found that innovative recruitment and
compensation practices have positive significant relationship with firm performance. It was also
observed that HR department seems to be the most important factor for enhancing corporate
performance in the context of economic liberalization. This study holds importance because
liberalization created competition and adoption of innovative HRM practices are important for
increase in corporate performance.

Singh. et al. (2008) conducted a study to examine the impact of Human resource policies and
practices on organizational performance. They suggested that the employees should motivated
through higher than industry average wages, performance linked wages and stock option schemes
and if human resource policies are updated on regular basis there is a high likelihood that the
organization will achieve high employee morale, adaptability, quality of product and service, learning
and growth and impact on industry. This study reveals that empowering people through extensive
information sharing, job rotation, and multi-tasking and decentralizing decision making powers is
more likely to help improve the various dimensions of performance, and thus organization can take

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initiative to introduce best human resource practices for enhancing organizational performance.
Empowerment and Meritocracy also emerged as significant predictors of overall performance.

Purang (2008) attempted to measure the relationship between different dimensions of HRD climate
(Participation, succession planning, training, performance appraisal and job enrichment) and
organizational commitment. This study resulted that positive perception of climate shall enhance
the commitment, which further increase the performance of the employees, and thus overall
organizational performance.

Wright. et al.(2007) article reveals that both organisational commitment and HR practices are
significantly related to operational measures of performance

S. Biswas, Kailash, B.L. Srivastava and Vijai N. Giri (2007) in their study of Indian organizations
described the linkages between a firms human resource management practices, their effect on
individual organizational members behavior and enhancement of organizational efficiency. The
findings of the study confirmed that the extra role activities of an individual increased his
attachment to the job, organizational citizenship behavior had a significant influence on employees
level of job involvement and there existed favorable association between job involvement and
organizational effectiveness. Lastly, it was found that satisfied employees will contribute towards,
the effectiveness of an organization.

Cathrine Byremo. (2015) The study concludes that it is still too early to say that HRM causes
improved performance. However, the amount of empirical evidence of a positive relationship also
leads this thesis to conclude that HRM can have a positive impact on performance.

Nancy Quansah (2013) It was recommended in the study that rural banks should dedicate a
department to HR for the proper management of human resources through whom competitive
advantage could be created.

S.Ramaya, (2007) explained about the responsibility of the organization to utilize human resource in
the best manner for the achievement of business results. The concept of balanced score card make
organization to achieve objectives through HRD. The findings of the study shows cause and effect
linkage between investment in training and development and an organizations business goal.

Chand & Katou (2007) have conducted a study on Indian hotel industry covering 439 hotels and
resulted that Hotel performance is positively associated with HRM system of recruitment and
selection, manpower planning, job design, training and development, quality circles and pay system
and also related with hotel category (chain or individual hotel). They affirmed that Hotels who

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belong to chain category and focus on best HRM practices achieve higher performance as compared
to other category.

D.K.Pandey (2007) described that in the changing scenario the role of HR in the organization must be
align with organizational goals. This can be achieved through best HR practices. This paper provided
diverse HRM reforms and suggesting best HRM practices. Quality of life for workers and positive
organizational climate would be the greatest contributor for the retention of workers and for their
high morale. It was suggested that performance appraisal technique should be tailored according to
the job. It was further suggested that trade union should work for wage increase and other
concessions that can increase the productivity and performance of Human Resource. These new
HRM Practices and Reforms are imperative.

Shahnawaz, M.G. and Rakesh C. Juyal (2006) in their research paper" Human Resource Management
Practices and Organizational Commitment in Different Organizations" concluded that HRM refers to
the overall philosophy about the organization and how people should be managed and is not merely
limited to certain specific functions. HRM focuses on congruence and commitment instead of
compliance and control. This study suggested that there is a need to develop industry specific HRM
policy and practices to remain competitive and to develop committed workforce.

Singh kuldeep (2004) in his research paper entitled Impact of HR practices on perceived firm
performance in India studied impact of HR practices on perceived firm performance in India
identifying 82 firms out of a sample of 359 firms selected from BT- 500 index with response rate of
22.84 %. The study used various HR Practices as independent variables whereas the perceived
organizational performance and market performance as dependent variables. The results indicated
that there is highly significant relationship between two human resource practices Training (r = 0.37,
0.39) and Compensation system (r = 0.41, 0.43) and positive impacts on perceived general and
market performance of the firms, indicating that an increase of (1) unit in compensation will
increase (0.41) in the firms performance and (0.43) in the firms market performance. An addition of
(1) unit in training will enhance (0.37) the firms performance and (0.39) in the firms market
performance, secondly,. On the other hand two practices, namely job definition (r = -0.21) and
career planning system (r = -0.15) had a negative and an insignificant impact on perceived firm
performance. The result highlighted the positive relation among several HR practices like Training,
employee participation, compensation, selection, performance appraisal, and firm performance with
correlation point r= 0.32. This study holds importance because it has been conducted outside US
context where most of the previous studies of this type have been conducted earlier.

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Goyal (2004) concluded in his study that human resource plays an important role in development
and growth of any organization and for that matter of any economy. Among all the factors of
production only human resource are living being and have unlimited capacity and potentials. Such
capacity and potentials of human being can be developed for the benefit of organization by applying
proper strategies.

Paul and Anantharaman (2003) explored the causal model linking HRM with organizational
performance in Indian software companies and found that not even a single HRM practice has direct
causal connection with Organizational performance. Further it was mentioned that HRM practices
such as job design, compensation and incentives, training directly affect the operational
performance parameters viz. employee retention, employee productivity, product quality, speed of
delivery and operating cost. They suggested that integrated approach to link HRM practices with
organizational performance should be adopted.

Sivasubramaniam & Venkataratnam (1998) studied the relationship between HRM and firm
performance in 52 companies in India. This research gives evidence of relationship of HRM with
company performance. The findings stated that an adoption of HR strategy translates into 4% edge
in return on investment and nearly 5% advantage in return on assets. It was also observed that
match between HR strategy and business strategy results in reduction of 8% in turnover rates. They
recommended that when market conditions get tougher and competitors attempt to imitate our
products and services, which is sustainable and un-imitable is the Human resource based advantage.

Jain (1996) in his publication HRD Practices in Indian Industries examines the impact of HRD
policies and practices on increasing Organizational Effectiveness and through light on the
development of a cohesive HRD climate. He studied the conceptual framework of HRD by
undertaking the past and present patterns of HRD in two public sector undertakings which is BHEL
and NFI. He studied the relationship between HRD variables, personal factors and effectiveness
variables. The author emphasized that the importance of the HRD practices are yet to be
acknowledged in their contribution toward organizational effectiveness. In this context the author
also presented a general model of HRD, which explains the factors contributing significantly for the
development of public sector undertakings in India.

Dandekar, Karnik and Sathye (1994) Improving HRD in the Power Sector: The Case of Performance
Appraisal in MSEB, assessed the importance of human resource in state electricity board
Maharashtra. Improvement in the performance of Public Sector Undertakings is by and large
depends upon the development of Human Resources available in the organizations. The role of HRD

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becomes essential with improvement in service sector where technology up gradation demands
efficient and productive workforce to achieve organizational targets. Service sector where people
interface are of great importance, the role of HRD in utilizing human capital to enhance the
knowledge and skills and efficiency in order to motivate people.

Bharwaj, Rupali and Khandelwal, (1993) in their research work entitled HRD: A key to organizational
Effectiveness. linked HRD managers, line managers and top management for successful
implementation of HRD practices, after review of several case studies and experiences in India,
noted Western and third World studies of organizational excellence indicate five major keys to
organizational excellence: mission, vision of excellence, core values, style of management; goals,
policies and choice of domain; management systems and structure; and organizational renewal
processes

Abraham (1989) surveyed the HRD practices of 68 Indian organizations. He measured various
elements of the HRD profile of these organizations including Training performance appraisal, career
planning, Employee counseling, promotions, rewards etc. and the HRD climate (openness,
collaboration, trust, authenticity, pro-action, autonomy, confrontation). Abraham also constructed
an index of growth of the company profitability as a measure of organizational performance. He was
able to use this index only in 14 of the 68 companies. He found that while the HRD profile did not
correlate with the company performance, the HRD climate did. He found that the perception of the
HRD climate of the company was more important than the HRD practice itself. This study also
indicates that HRD culture is a powerful intervening variable in translating HRD practices into profit.
The HRD manager matters a lot in this regard alone with line managers and top management.

Porter (1985) has described a wider outlook and suggested that firms should analyze their
competitive environment, choose their strategies and then acquire the resources needed to
implement those strategies. Almost all the firms use same resources to implement these strategies
or to have the same access to these resources. He has discussed organizational internal qualities that
may affect competitive advantage. He argues that human resources management policies can
present a important source of competitive advantage because they make employee more effective
and productive. Superior employees create superiority in their activities. Porter thus comes to the
conclusion that there exists strong interaction between the quality of a firms human resources
management practices and its sources of competitive advantage in the markets.

Pareek and Rao (1977) Larsen & Toubro a prominent Engineering Company in India had appointed
two consultants from the Indian Institute of Management, Ahmadabad to study the effect of

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performance appraisal system and make recommendations for improving it. The two consultants
(Pareek and Rao, 1975) studied the system through interviews etc, and suggested a new system.
They recommended that " Performance Appraisal, Potential Appraisal, Feedback and Counseling,
Career Development, Career Planning and Training and Development get attention as unique parts
of an integrated system which we call the Human Resources Development System" This system was
proposed as a separate system with strong linkages with Personnel (Human Resources) system. In
their second report of the Human Resources system in L&T suggested that the personnel function be
viewed as Human Resources Function (HRF). Personnel Administration, HRD, Worker Affairs and
Organization development should be added to the HRD Function, the consultants recommended
that" Since OD is being added now, it is necessary to strengthen that part of HRD.

HR Practices and Organizational Performance: Conceptual and Empirical Overview

HR Practices
Human resource management (HRM) refers to the policies and practices involved in carrying out the
human resource(HR) aspects of a management position including human resource planning, job
analysis, recruitment, selection, orientation, compensation, performance appraisal, training and
development, and labour relations (Dessler, 2007, p. 4). HRM is composed of the policies, practices,
and systems that influence employees behaviour, attitude, and performance (Noe, Hollenbeck,
Gerhart, & Wright, 2007, p. 5). There are four top models of HRM such as the Fombrun, Tichy, and
Devana Model of HRM, the Harvard Model of HRM, the Guest Model of HRM, and the Warwick
Model of HRM (Bratton & Gold, 1999, pp. 17-24). Out of these models, the Fombrun, Tichy, and
Devana Model of HRM are considered to be the first one (Aswathappa, 2008, p. 18). The present
study selected the HR practices such as recruitment and selection, training and development,
performance appraisal, and compensation which were incorporated by the Fombrun, Tichy, and
Devana Model of HRM. The model assumed that these four key HR practices have significant impact
on organizational performance.

Organizational Performance
The ultimate goal of a business organization is higher financial performance or maximisation of
wealth for stake holders (Becker & Huselid, 1998; Horngren, Foster, & Datar, 2000). Nonetheless,
attaining the organizations goals depends upon the extent to which its organizational performance
is reached (Katou & Budhwar, 2007). Organizational performance is generally indicated by
effectiveness (whether an organization can achieve its objectives), efficiency (whether an
organization uses resources properly), satisfaction of employees and customers, innovation, quality

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of products or services, and ability to maintain a unique human pool (Delaney & Huselid, 1996; Dyer
& Reeves, 1995; Guest, 2001; Katou & Budhwar, 2007). The organizational performance variables of
the present study included features such as product quality, customer satisfaction, new product
development, ability to attract employees, ability to retain employees, and relationship between
management and employees. According to the earlier studies (Delaney & Huselid, 1996; Harel &
Tzafrir, 1999; Singh, 2004), the respondents were asked to assess their organizations performance
in comparison to the performance of their competitors.

Relationship between HR Practices and Organizational Performance

Though most of the studies have been conducted in the western world, it is now well established
that HR practices have significant impact on productivity, corporate financial performance, and
employee turnover (Arthur, 1994; Huselid, 1995; Ichniowski, Shaw, & Prennushi, 1997; Katou &
Budhwar, 2007). Pollitt (2004) found that the HRM practices of Nokia played vital role in helping the
company in reaching its 40% percent share of the global handset market, and industry leading profit
margins of 20%-25% at a time of unmatched change and competition. Katou and Budhwar (2007)
through an in-depth study on 178 manufacturing firms of Greece found that HR practices such as
recruitment, training, promotion, incentives, benefits, involvement, and safety and health were
positively related with the elements of organizational performance such as innovation and
satisfaction of stakeholders. Singh (2004) in a study on 82 Indian firms observed that HR practices
such as training and compensation had significant impact on perceived organizational performance.
Hypothesis 1: HR practices have significant association with organizational performance

Hypothesis 2: HR practices have significant impact on organizational performance:

The Recruitment and selection process determines the decisions as to which candidates will get
employment offers. The aim of this practice is to improve the fit between employees, the
organization, teams, and work requirements, and thus, to create a better work environment (Tzafrir,
2006). Sophisticated recruitment and selection system can ensure a better fit between the
individuals abilities and the organizations requirement (Fernandez, 1992). Hunter and Schmidt
(1982) concluded that employment stability can be achieved through a selection procedure based on
ability. Katou and Budhwar (2007) also found that recruitment and selection was positively related
to all organizational performance variables such as effectiveness, efficiency, innovation, and quality.

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Hypothesis 3: Recruitment and selection positively influences on organizational performance:
Training and development is considered to be the most common HR practice (Tzafrir, 2006).Training
and development refers to any effort to improve current of future employees skills, abilities, and
knowledge (Aswathappa, 2008). Thang and Buyens (2008) through reviewing 66 studies conducted
in different parts of the world opined that training and development leads to superior knowledge,
skills, abilities, attitudes, and behaviour of employees that eventually enhance organizational
performance. Hoque (1994) unearthed that training and development had positive impact on
organizational effectiveness in south asian context.

Hypothesis 4: Training and development positively influences on organizational performance:

Performance appraisal is a systematic process to evaluate the performance of an employee after
certain period (Schuler, 1981, p. 211). Performance appraisal also influences other HR practices such
as recruitment and selection, training and development, compensation, and employee relations. As
performance appraisal leads to pay raise, promotion, and training; it is assumed that better
performance appraisal can have impact on organizational performance.

Hypothesis 5: Performance appraisal positively influences on organizational performance:

Compensation refers to all types of pay or rewards going to employees and arising from their
employment (Dessler, 2007, p. 390). Compensation is very much important for employees because it
is one of the main reasons for which people work. Employees living status in the society,
satisfaction, loyalty, and productivity are also influenced by the compensation (Aswathappa, 2008).
Delaney & Huselid (1996) found that incentive compensation was associated with perceived market
performance in USA. Employee compensation, particularly the performance based compensation
system, resulted in better organizational performance in Indian firms (Singh, 2004).

Hypothesis 6: Compensation positively influences on organizational performance:

Raneem et al (2001) studied HRM practices of 92 medium and large business enterprises (public and
private sector) located in India. They found that only 62% of surveyed organizations had an
HR/Industrial Relations (IR) department. Ramesh et al (2002) measured correlation between
employees opinions regarding HRM practices in their enterprises, their age, education, and
experience. Soumya.c (2004) observed that other than organizational contingencies, the institutional
context such as national education and training system, national industrial relations system,
regulatory frameworks, and overall societal context had significant influence on the development of

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HR practices in India. Furthermore, HR practices were found to have significant impact on affective
commitment in context to India. Thus, the above review of literature shows that there have been
several studies around the globe focusing on HR practices and organizational performance.
However, very limited numbers of studies have been conducted on the impact of HR Practices on
organizational performance in context of India and other developing countries. This study has been
undertaken to fill this obvious research gap.

3. Research Methodology

a. Conceptual Design

Independent Variables (IDVs) ---------------------------- Dependent Variables (DVs)

b. Research Questions
Specifically, this study was undertaken to explore the answer to the following research questions
(RQ):
RQ1: Is there any association between HR practices and Organizational Performance?
RQ2: Do HR practices have any impact on Organizational Performance?

Hypothesis
Hypothesis 1: HR practices have significant association with organizational performance
Hypothesis 2: HR practices have significant impact on organizational performance
Hypothesis 3: Recruitment and selection positively influences on organizational performance
Hypothesis 4: Training and development positively influences on organizational performance
Hypothesis 5: Performance appraisal positively influences on organizational performance
Hypothesis 6: Compensation positively influences on organizational performance

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 c. Variables

d. Data Collection
The study would be complied with the help of primary data and secondary data(whenever needed).
Questionnaire survey method would be used to gather primary data in the present study. A multi-
item likert scale questionnaire would be constructed with some modifications to already existing
questionnaires (Delaney & Huselid, 1996; Harel & Tzafrir, 1999; Singh, 2004, Mir Mohammed Nurul
Absar et al.2010) to measure the HR practices and organizational performance of small
manufacturing firms in Panchkula respectively. As HR managers are the most reliable persons to
provide data related to HR practices and overall organizations (Huselid & Becker, 1996; Tzafrir,
2006), the structured questionnaire would be sent to the HR managers of the surveyed
manufacturing firms. Moreover, the desk study would cover various published and unpublished
materials on the subject.

e. Sampling
1. A sample size of 40 is desired.
2. Sample would be randomly selected from list of small scale manufacturing units enlisted in
various associations of industries as members under Department of Industries and
Commerce, Haryana. The selected associations are Haryana Chamber of Commerce &
Industries Pkl, Panchkula Chamber of Commerce and Industries, and HMT Ancillry
Association. The sampling method would be simple random sampling from the constructed
list of industries to select 40 small scale manufacturing units. The structured questionnaire
would be sent to the HR managers/supervisors of the all 40 manufacturing firms.

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 f. Data Analysis
In the present study, we analysed our data by an enter wise method in a multiple regression
analysis. In this context, a multiple regression was performed, by making use of all the discrete
variables (i.e., dependent and independent variables) available in the dataset. The estimation
process was based on Ordinary Least Squares (OLS) [i.e.,Y= a + bx]. For this, purpose, we consider
the following model specifications, by taking as dependent variable i.e., organizational performance
by making HR practices as independent variables.

OP=O+1(RNS)+2(TND)+3(PA)+4(COM)+e...Model (1)
Where 0 , 1, 2, 3, and 4, are the regression co-efficient
OP : Organizational Performance
RNS : Recruitment and Selection
TND : Training and Development
PA : Performance Appraisal
COM : Compensation
e: error term

To test how well the model-1 fit the data and findings, correlation (r), R, R2 (Coefficient of
determination), variance, analysis of variance (ANOVA) and the t statistic were used. Correlation
analysis was performed to find out the pair wise relationship between variables; RNS, TND, PA, COM,
and OP.
A multiple regression analysis was performed to identify the predictors of OP as conceptualized in
the model. An enter-wise variable selection was used in the regression analysis.
Hypothesis wise analysis would be done.

g. Appendix I (Sample Questionnaire items) 5 point likert scale

1. Perceived Organisational Performance

a. How would you compare the organisations performance over past 3 years to that of
other organisations that do the same kind of work? Like
Quality of products, services etc.
Development of new products, services
Ability to attract essential employees

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 Ability to retain essential employees
Satisfaction of customers and clients
Relations between management and other employees
Relations among employees in general
2. Recruitment and selections
a. In past 2 years, about how many applications have yu considered for each core opening
b. In past 2 years, about how many applications have yu considered for each GSS opening
c. In past 2 years, about how many applications have yu considered for each Managerial
opening
3. Training and development
a. Apart from on-the-job training In past 2 years did the organization provide any
employees with formal job training, either on or off the premises
b. Within the last 2 years, how many employees participated in formal job training
c. Overall, how effective would you say your employee training is
4. Compensation
a. How important is job performance in determining the earnings of managers and
administrators
b. How important is job performance in determining the earnings of Cores
c. How important is job performance in determining the earnings of GSSs
d. Do you think your compensation was fair and well, as compared to the industry
standards
e. Did you introduce new incentive schemes over past 2 years
5. Performance appraisal
a. Accroding to you how fair is performance appraisal system in your organisation
b. How likely it is that your employees find your appraisal system fair

Submitted to:
Dr. Purva Kansal

Submitted by:
Sunil Kumar Saroha
Pre Ph.D(HR-I)
Dated: 1-12-17

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