Chapter 1 (4)

1.6      Background to the Study

In the last ten years, organizations especially in Indonesia have been hit with the undisputable fact that the creation of competitive advantage lies in people. Organizations have increasingly recognized the potential for their people to be a source of competitive advantage. Not too long ago, so called HR functions was the preserve of „Personnel Managers‟ whose duties were to recruit and select, appraise, promote and demote. These superficial duties could be performed by any manager, it therefore never seemed necessary to employ an expert in the form of a human resource manager let alone create a whole department dedicated to HRM. Little attention was paid to human resource management issues and its impact on organizational performance. The emphasis on traditions and socio-cultural issues injected an element of subjectivity in „personnel manager‟ functions such as recruitment and selection, performance appraisal, promotion, demotion, and compensation.

In today’s competitive and rapidly changing business world, organizations especially in the service industry need to ensure maximum utilization of their resources to their own advantage; a necessity for organizational survival. Studies have shown that organizations can create and sustain competitive position through management of non-substitutable, rare, valuable, and inimitable internal resources (Barney, 1991). HRM has transcended from policies that gather dust to practices that produce results. Human resource management practices has the ability to create organizations that are more intelligent, flexible and competent than their rivals through the application of policies and practices that concentrate on recruiting, selecting, training skilled employees and directing their best efforts to cooperate within the resource bundle of the organization. This can potentially consolidate organization performance and create competitive advantage as a result of the historical sensitivity of human resources and the social complex of policies and practices that rivals may not be able to imitate or replicate their diversity and depth.

Lately, organizations are focused on achieving superior performance through the best use of talented human resources as a strategic asset. HRM policies or strategies must now be aligned to business strategies for organizational success. No matter the amount of technology and mechanization developed, human resource remains the singular most important resource of any success-oriented organization. After all, successful businesses are built on the strengths of exceptional people. HRM has now gained significance academically and business wise and can therefore not be relegated to the background or left in the hands of non-experts. Attention must be paid to the human resources organizations spent considerable time and resources to select.

Armstrong (2009) defines Human Resource Management (HRM) as a strategic and coherent approach to the management of an organization’s most valued assets; that is, the people working there who individually and collectively contribute to the achievement of its objectives. Moreover, Human resource management practices can be defined as a set of organizational activities that aims at managing a pool of human capital and ensuring that this capital is employed towards the achievement of organizational objectives (Wright and Boswell, 2002). The adoption of certain bundles of human resource management practices has the ability to positively influence organization performance by creating powerful connections or to detract from performance when certain combinations of practices are inadvertently placed in the mix (Wagar and Rondeau, 2006). So if we think human resource management as just the services any manager may provide in recruiting and selecting, appraising, training and compensating employees, then we rather would have to take the backseat for those who understand the influence HRM has on corporate performance to take the center stage. Research has recorded a positive relationship between human resource management practices and corporate performance. Thus in order to stimulate corporate performance, management is required to develop skilled and talented employees who are capable of performing their jobs successfully (Klein, 2004).

Achieving better corporate performance requires successful, effective and efficient exploit of organization resources and competencies in order to create and sustain competitive position locally and globally. HRM policies on selection, training and development, performance appraisal, compensation, promotion, incentives, work design, participation, involvement, communication, employment security, etc. must be formulated and implemented by HRM specialist with the help of line managers to achieve the following outcomes: competence, cooperation with management, cooperation among employees, motivation, commitment, satisfaction, retention, presence, etc.

In fact, Ahmad and Schroeder (2003) found a positive influence of human resource management practices (information sharing, extensive training, selective hiring, compensation and incentives, status differences, employment security, and decentralization and use of teams) on organizational performance as operational performance (quality, cost reduction, flexibility, deliverability and commitment). In furtherance of this assertion, Sang (2005) also found a positive influence of human resource management practices (namely, human resource planning, staffing, incentives, appraisal, training, team work, employee participation, status difference, employment security) on organization performance.

For businesses to survive, HRM should be given its rightful place of relevance in any organization and not left in the hands of line managers who neither have the expertise nor the time and space to carry out the enormous functions of a human resource manager.

The purpose of this study is to determine the impact of HRM practices on organizational performance in Indonesian organizations.