Description
The Treasury Department‘s (2010) most recent Intergenerational Report projects that Australia‘s rate of economic growth will average 2.7 per cent a year over the next 40 years, down from 3.3 per cent a year over the past 40 years. National growth rates are determined by three supply side factors, population, participation and productivity, also known as the 3 Ps.
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Leadership, Culture and Management Practices
of High Performing Workplaces
in Australia
Literature Review and Diagnostic Instruments
A report commissioned by the
Department of Education, Employment and Workplace Relations
January 10, 2011
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Authored by Boedker C., Cogin J., Langford P., Meagher K., Mouritsen J., Runnalls M., Sheldon P.,
Simmons S. and Vidgen R.
Published January, 2011.
The text, data and content in the document may be reproduced providing that it is appropriately represented and
referenced and not used in a misleading context. If any material in this document is reproduced, it must be
appropriately referenced, the authors of the document listed in full, the title of the document specified, and the
UNSW copyright acknowledged.
Where any third party material has been referenced you will need to obtain permission from the parties concerned.
For any other use of this material please write to the authors of the report, as follows:
The University of New South Wales
Australian School of Business
Kensington, New South Wales 2052
Sydney, Australia
Email: [email protected]
Website: www.unsw.edu.au
This project has been funded by the Australian Government Department of Education, Employment and Workplace
Relations through the Workplace Innovation Program and the Society for Knowledge Economics, 2009.
Published by the Society for Knowledge Economics, Sydney, Australia, 2011.
ISBN: 978-0-9775436-2-5
© University of New South Wales, 2011.
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Contents
EXECUTIVE SUMMARY ......................................................................................................................................................... 4
AUTHORS AND RESEARCH TEAM ......................................................................................................................................... 7
ACKNOWLEDGEMENTS ...................................................................................................................................................... 10
BACKGROUND ................................................................................................................................................................... 11
AIMS OF REPORT ............................................................................................................................................................... 12
1. INTRODUCTION ............................................................................................................................................................. 13
1.1. WHAT IS DRIVING CHANGE AND WHAT ARE THE IMPLICATIONS FOR ORGANISATIONS? ..................................................................... 13
1.2. WHAT IS A HIGH PERFORMING WORKPLACE? ........................................................................................................................... 15
1.3. A CALL FOR REFORM TO WORK SYSTEM DESIGN AND MANAGEMENT PRACTICES IN AUSTRALIA ......................................................... 20
1.4. WHO IS RESPONSIBLE FOR CREATING A HIGH PERFORMING WORKPLACE? ..................................................................................... 21
1.5. WHAT ARE THE POTENTIAL BENEFITS TO EMPLOYERS, EMPLOYEES AND POLICY MAKERS OF HIGH PERFORMING WORKPLACES? ............... 23
2. LITERATURE REVIEW: HIGH PERFORMING WORKPLACES .............................................................................................. 26
2.1. LEADERSHIP ........................................................................................................................................................................ 26
2.2. ORGANISATIONAL CULTURE ................................................................................................................................................... 32
2.3. HUMAN RESOURCES MANAGEMENT ....................................................................................................................................... 39
2.4. ORGANISATION DESIGN ........................................................................................................................................................ 50
2.5. INDUSTRIAL RELATIONS ......................................................................................................................................................... 60
2.6. TRAINING ........................................................................................................................................................................... 72
2.7. ACCOUNTABILITY AND MANAGEMENT ACCOUNTING CONTROLS ................................................................................................... 83
2.8. THE ROLE OF THE BOARD IN CREATING A HIGH PERFORMANCE WORKPLACE ................................................................................. 108
2.9. INFORMATION AND COMMUNICATION TECHNOLOGY ................................................................................................................ 110
2.10. FACTORS THAT CAN MODERATE FIRM PERFORMANCE ............................................................................................................ 116
3. BARRIERS TO HIGH PERFORMING WORKPLACE PRACTICES ......................................................................................... 119
3.1. A KNOWLEDGE PROBLEM .................................................................................................................................................... 119
3.2. AN IMPLEMENTATION PROBLEM ........................................................................................................................................... 119
3.3. AN UNWILLINGNESS TO RELINQUISH CONTROL ........................................................................................................................ 120
3.4. ACCOUNTABILITY AND MEASURING VALUE CREATION ............................................................................................................... 121
4. BACKGROUND TO THE DEVELOPMENT OF THE SURVEYS ............................................................................................. 122
4.1. REVIEW OF EXISTING WORKPLACE AND MANAGEMENT SURVEYS ................................................................................................ 122
4.2. SURVEY DESIGN................................................................................................................................................................. 133
4.3. SURVEY METHODS ............................................................................................................................................................. 133
5. INDUSTRY SECTOR SURVEYED: PROPERTY AND BUSINESS SERVICES ........................................................................... 137
5.1. INTRODUCTION ................................................................................................................................................................. 137
5.2. INDUSTRY COMPOSITION: A DEFINITION ................................................................................................................................ 137
5.3. ECONOMIC CHARACTERISTICS OF INDUSTRY SECTOR ................................................................................................................. 138
5.4. SIGNIFICANT TRENDS .......................................................................................................................................................... 139
5.4. CONCLUDING SUMMARY ..................................................................................................................................................... 140
BIBLIOGRAPHY ................................................................................................................................................................ 141
ABOUT THE SOCIETY FOR KNOWLEDGE ECONOMICS ....................................................................................................... 167
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Executive Summary
The Treasury Department‘s (2010) most recent Intergenerational Report projects that Australia‘s rate of economic
growth will average 2.7 per cent a year over the next 40 years, down from 3.3 per cent a year over the past 40
years. National growth rates are determined by three supply side factors, population, participation and
productivity, also known as the 3 Ps.
Whilst over the past 40 years, the first two Ps have made a net positive contribution to economic growth, over the
coming 40 years they are projected to make a net negative contribution to growth. Population growth, for
example, is expected to slow slightly (with birth rates forecasted at 1.9 babies per female), and the participation
rate is expected to fall along with an ageing population. This means that demand for labour will outstrip supply.
The moral of this is that what happens to the 3
rd
P, productivity, will have a much greater impact on the rate at
which Australia grows and Australians enjoy rising living standards in future decades.
This report suggests that to lift Australian productivity in forthcoming years, policy makers and others need to
direct much more policy focus and effort at the workplace level, including the leadership, culture and management
practices that affect each worker every day.
Traditionally, the levers of intervention into workplace productivity have been directed towards: first, investments
into training and skills development; and, second, regulatory interventions (such as industrial relations reform, tax
incentives etc.) that aim to make companies more competitive and fair(er) places to work.
A third lever is that of leadership, culture and management practices and the impacts such practices can make on
workplace productivity and innovation. This was identified by the Deputy Prime Minister, Julia Gillard, at her
Workplaces of the Future Forum, in July, 2009. In a subsequent interview (The Australian, 2009), she explained
that ?last month's forum acknowledged the need to unlock the final piece of the productivity puzzle?, and that ?over
the coming months and years we will be looking at ways of embedding change through workplace relations,
innovation and leadership practices in workplaces". A further statement was made by Ms. Gillard, that:
"...to truly unlock the productivity of our nation … we need workplace leadership and the requisite
cultures and skills that will build upon the foundations of the Fair Work Act to encourage innovation,
employee engagement and cooperation in our workplaces."
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At the Workplaces of the Future Forum, research was identified as a first important step to unlocking the
?productivity puzzle? and ?opening up the black box of management?. Evidence-based policy needs to be
grounded in reliable data about workplace performance, including the leadership, culture and management
practices that prevail in Australian firms and the productivity impacts these practices produce.
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The Deputy Prime Minister‘s speech at the 15
th
World Congress of the International Industrial Relations Work Congress, August 24-27, 2009,
Darling Harbour Convention Centre, Sydney.
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Not since the 1990s has Australia paid co-ordinated attention to work system designs and management practice.
Government initiatives in the 1990s included the Karpin Commission Report (1995), the Australian Workplace
Industrial Relations Surveys (1995, 1990), and the Best Practice Demonstration Program (Rimmer et al, 1997).
Yet, since then, little attention has been paid to these important areas of productivity enhancement. As an
example, Australia has not conducted a national workplace survey for the past 15 years.
This two year project is an initial step towards (re)starting a national discussion about the leadership, culture and
management practices that prevail in Australian firms. Recent research commissioned by the Department of
Innovation, Industry Science and Research shows that management practices matter to workplace productivity
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.
This current study seeks to deepen our understandings of the intricate linkages between workplace productivity
and such practices. Specifically, this project identifies the attributes of high performing workplaces and tracks the
culture, leadership and management practices that result in higher firm performance (as measured by workplace
productivity, innovation, fairness and employee engagement).
The project‘s objectives are to:
1. Identify the attributes of a high performing workplace;
2. Assess, via a survey of 100-120 Australian firms, which workplaces are high performing (and which are
not), and why;
3. Implement a series of high performing workplace strategies with 20 of the surveyed firms over a 12
month period with a view to lifting firm performance;
4. Measure the impacts of the high performing workplace strategies, including any changes in workplace
productivity and innovation resulting from the introduction of new leadership, culture and management
practices.
Over the two year period, the project will produce three publications:
1. A report that outlines the survey instrument and a literature review that informs the development
of the survey instrument (as presented in this report). Once approved by DEEWR, the survey
instrument will be run with 100-120 firms in the services sector of the Australian economy;
2. A report that details the results of the survey. The report will identify the percentage of firms within the
sample population that are high performing (and which are not) and the types of leadership, culture and
management practices that high performing firms deploy and benefit from;
3. A Guideline for High Performing Workplaces. The Guideline will track and report on the effects of the
implementation of the high performing workplace strategies with 20 firms. It will also re-survey the 20
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?The relative level of firm output associated with an increase of a single point in the management score is equivalent to a 56% increase in
the labour force or a 44% increase in invested capital? (Green et al, 2009, p.13).
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firms, who have participated in the intervention strategies, and measure any changes in productivity and
innovation at the end of the 12 months period.
The results of the literature review (undertaken in Section Two of this report) suggest that high performing
organisations are those that:
? Excel at innovating and creating new products, services and business processes that meet, even
exceed, customer expectations and ensure organisational longevity;
? Achieve sound levels of productivity and financial performance;
? Achieve high levels of employee engagement and quality of life for employees;
? Provide fairness for people at work and for the stakeholders, customers and communities they serve.
The literature review also suggests that high performing organisations possess certain capabilities. They:
? Have leaders who truly care about enabling others to be the best they can and who seek to maximise the
potential and contributions of employees at all levels of organisational hierarchies;
? Have a change-oriented culture where people value, welcome, and even seek transformation and
innovation;
? Excel at collaboration and partnering internally and with customers and other stakeholders;
? Enable employees at all levels to participate in strategy design and decision making;
? Are responsive to shifts in customer preferences, changes in the environment, competition, etc;
? Have high levels of problem solving capability, knowledge acquisition and learning by all staff;
? Maximise the use of the full range of employee skills and abilities;
? Excel at utilising and adopting information and communication technologies;
? Use management accounting controls – like budgets, business plans, targets – to explore and debate
new and emerging business opportunities; and
? Constantly monitor and respond to changing customer needs and interests.
The survey instrument has been designed to test the hypothesis that the capabilities listed above result in higher
performance (as measured by workplace productivity, innovation, fairness and employee engagement).
Survey data will be collected from three sources: Chief Financial Officers
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, Human Resources Managers, and
employees. Collecting data from three sources reduces problems like self-reported survey bias. It also means that
we can test the impact of management practices on firm capabilities and, ultimately, firm performance. In doing
so, we extend the focus of the survey from perception-based testing (as done in many popular employee surveys
and opinion polls) to identify the performance impacts of management practices and firm capabilities.
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Financial data is collected from the Chief Financial Officer and is used to calculate actual profitability and productivity levels of the
participating firms. This contrasts previous surveys which use self-reported productivity data (see for example the UK Workplace Industrial
Relations Survey discussed in Section 4.2).
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Authors and Research Team
The following researchers have authored this report (in alphabetical order).
Dr Christina Boedker
Senior Lecturer, School of
Accounting, Australian School
of Business, UNSW
Christina is the lead investigator and has led 12 research projects for the SKE. Her research
focuses on strategy and management controls, measuring and reporting intangibles and
intellectual capital, workplace innovation, and leadership, culture and management
practices for high performing organisations.
Christina has been awarded the 2009 Emerald/EFMD Outstanding Doctoral Research Award
in the Interdisciplinary Accounting Research category, Accounting, Auditing & Accountability
Journal; two Emerald Literati Network Awards for Research Excellence (2006, 2009); the UK
Advertising Standards Authority Award; the Mindshift Consulting Group Prize; Saunders
Harris’ Prize for Outstanding Academic Achievement; the Carlson Companies’ Award;
MGSM’s Award for Competitive Intelligence; and MGSM’s Award for Human Resources
Management. Christina and the SKE Corporate Members received an Honourable Mention
for Outstanding Achievement in Research and Development at the 2008 Business and Higher
Education Roundtable Awards.
Christina was born in Denmark. Prior to coming to Australia eight years ago she worked as
department head of operations at a large US based organisation for six years. She did her
undergraduate (1
st
class honours) in Economics in the UK, and holds a Master Degree in
Accounting, an MBA in Financial Management, and a PhD in strategy and management
controls.
Associate Professor Julie
Cogin
Head of School of Organisation
and Management, Australian
School of Business, UNSW
Julie is an Associate Professor at the Australian School of Business, UNSW. She has held
various senior leadership roles in the ASB including Associate Head of School and Associate
Dean (Education). Julie has extensive experience in researching high performing workplaces.
Recently, she led a major workplace survey with a large multinational corporation
investigating culture, leadership and management practices on multiple firm level
performance outcomes. Julie has written two books, several book chapters and has
published in prestigious international journals.
She has been successful in securing and leading several Industry and University grants. She
recently finalised an Industry Grant with National Australia Bank “People Management
Capabilities that Enhance Performance”.
Julie has received the 2008 Australian Teaching and Learning Council (previously Carrick
Institute) national citation for contributions to teaching in tertiary education sector; the
2007 University of New South Wales Vice Chancellor’s award for teaching excellence; and
the 2006 Australian & New Zealand Academy of Management (ANZAM) best HRM research
paper. Julie will play a key role in the design of the survey methodology, the literature
review and report write ups.
Professor Kieron Meagher
Economics, Research School of
Social Sciences, Australian
National University
Kieron's three main current areas of research are: the economics of organisations, in
particular (i) management decision-making and authority structures; (ii) spatial competition
and location theory; and (iii) political economics and voting theory.
The techniques employed in Kieron’s research include incentive theory, hierarchy theory,
discrete choice theory, Bayesian decision making and uncertainty, graph theory and the
numerical simulation of complex systems. He applies microeconomic theory to
understanding situations that are more complex than can be described by a traditional price
mechanism.
Kieron holds a PhD in Economics from Australian National University, a Master of Arts
Honours Mathematics from Waikato University, and a Bachelor of Arts Mathematics from
Waikato University. He is the Associate Dean (Higher Degree Research) at ANU.
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Dr Peter Langford
Director of Voice Project and
Senior Lecturer, Macquarie
University
Peter has published, presented and consulted widely on topics including organisational
culture and climate, leadership, employee engagement, client loyalty and key account
management. He will be part of the research team, specifically the survey part.
He is the Director of Voice Project, a research and consulting practice based in the
Department of Psychology, Macquarie University. Voice Project is dedicated to using
organisational surveys to give critical stakeholders a voice and improve organisational
diagnosis and decision-making. In 2006, Peter won Macquarie University's Innovation Award
for industry partnerships developed through Voice Project. In 2007 Peter was awarded the
Elton Mayo Award for outstanding contributions to organisational psychology. He holds a
Bachelor of Science (Psychology) Honours; a Master of Psychology (Clinical), a Master of
Business Administration and a PhD.
Prior to working at Macquarie University, Peter was a consultant with Andersen Consulting
(now Accenture), working in change and project management consulting. Peter currently
lectures in human resource management and organisational psychology.
Professor Jan Mouritsen
Department of Operations
Management, Copenhagen
Business School, Denmark,
Visiting Professor, University
of New South Wales.
Jan brings extensive experience in measuring intellectual capital, innovation and high
performing work organisations. He will work with the research team on the literature
reviews, the design, analysis and collation of data from the survey and the final
recommendations including the guideline. Jan brings strong linkage with the European
research community.
Jan was the lead researcher on the Danish Intellectual Capital project, where over 100
Danish organisations produced Intellectual Capital statements over a 5 year period, the
largest IC project ever. The project was sponsored by the Danish Minister of Science,
Innovation and Technology. It resulted in the Danish Guideline on Intellectual Capital
Statements. Jan received a medal from the Danish Queen acknowledging the significance
and contribution of his work to the Danish Economy. Jan led the project team, many
research staff and PhD students.
Jan’s research is oriented towards understanding the role of management technologies and
controls in various organisational and social contexts. Jan has published in a large variety of
accounting and business management journals. Jan will be visiting Australia to partake in
this important project.
Mark Runnalls
Project Manager and PhD
Candidate, School of
Accounting, Australian School
of Business, UNSW
Mark Runnalls is a lead project manager of the project. He is a qualified Prince2 project
manager. During the last two years, Mark has worked on projects for organisations such as
DEEWR, the Victorian Department of Innovation and IBSA.
Prior to that, he spent twelve years as a Management Consultant and Partner with Ernst &
Young where he worked with Australian and international clients in the area of technology,
innovation and risk management. Mark is also a contract lecturer at UNSW on their post-
graduate degree program. In addition, Mark has worked for the UK Civil Service.
Mark holds the Prince2 and Managing Successful Programs qualifications, in addition to an
MBA from Imperial College, London, and a Bachelor of Arts (honours) from Cambridgeshire
College.
Mark recently enrolled in a PhD at UNSW. His research focuses on ambidextrous companies
and the use of management accounting controls in lifting workplace innovation and
outcomes.
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Associate Professor Peter
Sheldon
School of Organisation and
Management, Australian
School of Business, UNSW.
Peter is an Associate Professor in the School of Organisation and Management at UNSW
where he has also been the School's Associate Head of School. A leading authority on
employers' associations in Australia, he has also published widely on international
comparative industrial relations, and employment relations in Italy, Sweden and South
Korea. Peter's other main areas of research expertise are in Australian industrial relations
history and he is developing new research projects on employment relations in China.
Peter has co-edited 3 books on Australian industrial relations and has a forthcoming co-
edited book on employment relations in China. He has also published more than 30 refereed
journal articles and 20 book chapters across his range of research interests. He is on the
Executive Committee of the Industrial Relations Society of NSW and on the editorial advisory
boards of three journals. Peter has been awarded the 2009 Vice Chancellor's Award for
Teaching Excellence; the 2008 Australian School of Business Bill Birkett Award for Sustained
Teaching Excellence, and the 2007 Australian School of Business Teaching Excellence Award:
“Outstanding Performance in Team Teaching’ (for COMM 5001).
Peter holds a BEc (Hons) from Sydney University and a PhD from Wollongong University.
Peter oversees the industrial relations aspects of the project.
Shaun Simmons
Project Manager and Research
Assistant, School of
Accounting, Australian School
of Business, UNSW.
Shaun joined the academic team at the Australian School of Business in 2008, having spent
thirty years in commerce. He originally spent a decade working as a Chartered Accountant in
public practice before taking on corporate roles in finance, strategy and marketing.
Shaun’s public company roles include appointments as Chief Financial Officer and as the
executive accountable for marketing and business strategy.
Shaun has an Undergraduate degree in accounting and a Masters degree in marketing, both
obtained from the University of New South Wales. He is also a member of The Institute of
Chartered Accountants in Australia.
Shaun is currently enrolled as a research student in the School of Accounting and works as a
sessional lecturer in post-graduate programmes and AGSM executive programmes. He will
be contributing to both the research and project management aspects of this project.
Professor Richard Vidgen
Head of School of Information
Systems, Technology and
Management, Australian
School of Business, UNSW
Following fifteen years working in the IT industry, Richard studied for a PhD in Information
Systems at the University of Salford and then spent 12 years at the School of management,
University of Bath, UK, where he was latterly Professor of Information Systems.
He has produced more than 130 publications, including two co-authored books on IS
development and research papers in journals such as Information Systems Research,
Information & Management, the Information Systems Journal, and the European Journal of
Information Systems. Richard has over 15 years of experience in survey design.
Richard’s current research interests include the application of complex adaptive systems
theory to the study of high performing agile software teams, coevolutionary theory, and the
evaluation of Internet quality (e.g., e-commerce sites, knowledge-sharing applications,
intranets).
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Acknowledgements
This paper has been commissioned by the Workplace Innovation Fund within the Federal Government‘s
Department of Education, Employment and Workplace Relations (DEEWR) and the Society for Knowledge
Economics (SKE). The research is conducted by a team of researchers led by the University of New South Wales
(UNSW) in collaboration with the Australian National University and Copenhagen Business School.
The objective of the research is to examine the attributes of high performing workplaces in Australia and the role
of leadership, culture and management practices in lifting workplace performance. The SKE and UNSW are
grateful for this opportunity to work with the Federal Government, and for their support of this project. Specifically,
we would like to thank the following people for the opportunity to prepare this report:
? Jennifer Taylor, Group Manager, Tertiary Skills and Productivity Group, DEEWR.
? Anthony Fernando, Branch Manager, Workforce Development Branch, DEEWR.
? Richard Millington, Fund Manager, Workforce Development Branch, DEEWR.
? Phillip Steven. Innovation Team, Workforce Development Branch, DEEWR.
? Jenny Eccles, Assistant Director, Strategic Policy Group, DEEWR.
Thank you to Professor John Roberts from the School of Accounting, Sydney University, for writing the section on
the Role of the Board in Creating a High Performing Workplace. To gather input into this paper and to guide and
evaluate the research observations and recommendations, the SKE has put together a high profile Steering
Committee, whose members include:
? Karin Adcock, CEO, Pandora
? Matthew Ayres, Group Director, Strategy and Innovation, Lend Lease
? Iain Birks, CEO Australian Information Industry Association
? Professor Alec Cameron, Dean, Australian School of Business, UNSW
? David Caspari, Vice-President, HP Enterprise Services, South Pacific
? John Colvin, CEO, Australian Institute of Company Directors.
? Ruth Dunkin, Director, Policy, Business Council Australia
? Simon Edwards, Head of Government and Industry Affairs, Microsoft Australia
? Geoff Fary, Assistant Secretary, Australian Council of Trade Union
? Anthony Fernando, Branch Manager, Workforce Development Branch, DEEWR
? Associate Professor Peter Gahan, Monash University
? Professor Roy Green, Dean, School of Business, University of Technology Sydney.
? Sally Herman, General Manager, Corporate Affairs & Sustainability, Westpac Banking Corporation
? Justin Hill, Manager, Policy and Program Innovation, Enterprise Connect, Department of Innovation, Industry,
Research and Science (DIISR)
? Rosemary Howard, Executive Director and Conjoint Professor, Australian School of Business, UNSW
? Narelle Hooper, Editor, Boss Magazine
? Merran Dawson, Partner, Advisory Services, PricewaterhouseCoopers (PwC)
? Amanda McCluskey, Head of Sustainability and Responsible Investment, Colonial First State
? Clare Payne, Director, Integrity Office, Macquarie Bank
? Professor Richard Petty, President, CPA Australia
? Professor John Roberts, School of Accounting, Sydney University
? Associate Professor Peter Roebuck, Head of School of Accounting, UNSW
? Kim Schmidt, Director Human Resources, Woolworths
? Tim Sheehy, CEO, Chartered Secretaries Australia
? Robin Shreeve, CEO, Skills Australia
? Jennifer Taylor, Group Manager, Tertiary Skills and Productivity Group, DEEWR
? Pauline Vamos CEO, The Association of Superannuation Funds of Australia
? Steve Vamos, President, Society for Knowledge Economics
? John Vines, Chairman, Innovation & Business Skills Australia
? Jon Williams, Partner, PricewaterhouseCoopers
? Peter Wilson, National President, Australian Human Resources Institute
? Bill Withers, Chairman, Acquire Technologies
Thank you to two anonymous reviewers and also to the DEEWR reviewers for their helpful comments and
feedback on the paper.
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Background
This is a 2 year project commissioned by the Department of Education, Employment and Workplace Relations
(DEEWR) to the Society for Knowledge Economics (SKE) in December, 2009. The project is related to the
Federal Government‘s Workplace of the Future agenda, the subject of a Forum hosted by Deputy Prime Minister,
the Hon Julia Gillard MP, in July, 2009.
The project will survey 100-120 firms on their leadership, culture and management practices to establish which
practices result in higher performance and which do not. The project will also track the implementation of a series
of high performing workplace strategies designed to lift workplace productivity within 20 of these firms over a 12
months period.
The project will produce three publications including: a survey instrument, informed by a literature review (as
presented in this report); the results of the survey; and a Guideline for High Performing Workplaces.
This project follows the SKE tradition of industry partnering and collaboration. The collaborating partners on this
project are the:
? Department of Education, Employment and Workplace Relations
? Society for Knowledge Economics
? University of New South Wales
? CPA Australia
? PricewaterhouseCoopers.
The project follows previous collaborative research projects and reports by the SKE, specifically:
• Society for Knowledge Economics (2009), Leading Australia to More Innovative, Productive and Fulfilling
Workplaces—The Role of Government, prepared on behalf of the Department of Education, Employment
and Workplace Relations, November, 2009.
• Society for Knowledge Economics (2009), Workplaces of the Future, for the Department of Education,
Employment and Workplace Relations, for the Workplaces of the Future Forum, Melbourne, July, 2009.
• Society for Knowledge Economics (2008), Enabling Innovation: Leadership, Culture and Management at
the Workplace Level, prepared on behalf of the Victorian Department of Innovation, Industry and Regional
Development, June, 2008.
• Society for Knowledge Economics (2008), Australia’s National Innovation System, submission to Dr Terry
Cutler‘s National Innovation Review Panel, sponsored by the Business Council of Australia, April, 2008.
• Society for Knowledge Economics (2007), Intangible Drivers of Organisational Productivity and
Prosperity—International Trends and Developments in Extended Performance Management,
Measurement and Reporting, prepared on behalf of the Department of Finance, February, 2007.
• Business Council of Australia, in collaboration with the Society for Knowledge Economics (2006), New
Pathways to Prosperity—a National Innovation Framework for Australia, November, 2006.
• Society for Knowledge Economics (2005), Australian Guiding Principles on Extended Performance
Management: A Guide to Better Managing, Measuring and Reporting Knowledge Intensive Organisational
Resources, November, 2005.
12
Aims of Report
The aim of this report is to develop a survey instrument to identify and examine high performing workplace
practices in Australian firms. Specifically, the instrument investigates the leadership, culture and management
practices of Australian firms and their effects on workplace productivity, innovation, fairness and employee
engagement.
To achieve this objective, this report undertakes the following:
? Presentation of a conceptual model showing the anticipated relationships between the different elements
of the proposed survey;
? A literature review of high performing workplaces to identify which firm practices and capabilities result in
higher performance;
? A brief review of the barriers that may exist to implementing high performing workplace practices;
? An assessment of previous and current workplace surveys, including those used overseas;
? A description of the survey design and method;
? A key sheet describing the survey questions and why they have been chosen;
? The proposed survey questions.
13
1. Introduction
The concept of ?high performing workplaces? has generated widespread debate and interest in recent decades.
Boxall and Macky (2009) track the term‘s popularity to an influential public report by the Commission on the Skills
of the American Workforce (1990), America’s Choice: High Skills or Low Wages!. This report outlines concerns
about American jobs and is critical of Taylorist work organisation and a top down, hierarchical approach to
management. It argues that technological advances are not sufficient to save domestic firms. Firms need to
undertake significant reforms to work system design and management practices to successfully compete in the
future (see also, Appelbaum & Batt, 1994; Appelbaum et al., 2000). Such reform involves investing in ?high-
performance work organisation? and lifting skills levels. Firm performance is improved by lifting employee
involvement and responsibility for decision making. Japan (?lean production?), Sweden (?socio-technical
systems?), Germany (?diversified quality production?) and Italy (?flexible specialisation?) have similarly pursued
various models to reform workplace management practices.
Two initiatives have recently unfolded in the United Kingdom. First, Lord Mandelson, Secretary of State for
Business, Innovation and Skills, have commissioned and released a report called Engaging for Success:
Enhancing Performance through Employee Engagement (MacLeod & Clarke, 2009). This similarly calls for a
greater focus on workplace reforms to lift the performance of UK companies and the well-being of people at work.
It argues that lifting employee engagement ?can be a key to unlocking productivity and to transforming the working
lives of many people? (MacLeod & Clarke, 2009, p. 3). The report sets out evidence that underpins what we all
know intuitively, which is that only organisations that truly engage and inspire their employees produce world
class levels of innovation, productivity and performance. Second, the UK Commission for Employment and Skills
(2010) have launched four research projects on High Performance Working (HPW) to assist UK employers adopt
HPW practices. These include a policy review, case studies of firm practices, a literature review and a survey
instrument to conduct with UK employers. According to the UK Commission (2010), HPW encompasses a holistic
way to effectively manage an organisation. It encourages firms to review their business strategies; move up the
value chain; raise their demand for high skills; reorganise their work; and by so doing improve skills utilisation in
the workplace and, hence, improve firm performance
1.1. What is Driving Change and What are the Implications for Organisations?
A high performing workplace agenda has evolved, in part, due to broader changes in the global economy (Hope &
Hope, 1998). The world has become more interconnected and interdependent, more globalised and more
competitive thanks in part to internet technology and deregulation. The speed of business is faster than ever and
industry boundaries are less clearly defined. As a result, businesses are facing higher levels of complexity,
uncertainty and change. Australian firms have to compete with both global and local firms, innovate more, and
continuously lift efficiency to survive in a global economy increasingly dominated by low-cost producers (e.g. India
and China).
14
Parallel to this is a transformation in the factors of economic production and the emergence of a so called
?knowledge economy?. The industrial economy (making tangible goods) has largely been superseded by a
knowledge based economy (delivering services and knowledge based solutions) (Table 1). Intangible resources,
– partnerships, customer relations, business processes, information systems and technology, organisational
culture and structure, and human capital – now inform much of global economic growth and gross domestic
product (GDP). In 2005, service-based industries comprised over 68 per cent of world GDP, up from 61 per cent
in 1990. Meanwhile, goods producing industries contribute 28 per cent to world GDP, down from 34 per cent in
1990, and agriculture 4 per cent, down from 5 per cent in 1990 (World Bank, 2005). Australian data for 2008–09
shows that the services sector accounts for 64 per cent of GDP (around 77 per cent of total industry value added)
(DIISR, 2009a), whilst the manufacturing industry accounts for 8.7 per cent of GDP (DIISR, 2009b). New
management skills and competencies are required to successfully manage and lead in the 21
st
century where
people and other intangibles are the main factors of economic production.
Table 1: Changes in the Factors of Economic Production
Economic
Activity
Factors of Economic
Production
Agricultural
Economy
Pre-1800
Harvesting
? Land
? Land owners and
workers
Industrial
Economy
18th to 20
th
century
Manufacturing
? Labour
? Machinery
? Raw material
Knowledge
Economy
20
th
century and
onwards
Mediation of
knowledge and
services
? Relational capital
? Structural capital
? Human capital
Source: Boedker et al (2005, p. 19)
The net effect of these wider socio-economic changes is that the demands placed on business are changing and
expanding. Morgan and Anthony (2008) point out that the performance criteria that organisations have to meet
have evolved in a time-based model (see Table 2). It is no longer enough to be effective, efficient or productive;
firms also have to be flexible, responsive, and creative. More recently, ‘sustainable? and ‘knowledgeable? have
been added as key value drivers, once again augmenting the demands placed on business. Shop floor
employees, who are closest to the customers, are amongst those with the greatest knowledge. In the words of
Charles Handy, the power bases of firms have shifted and the organisational hierarchies are now ?upside-down?.
According to Handy, the net effect of this is that business leaders increasingly need to govern with the consent of
those being governed. All of these things together require greater autonomy in planning and execution by
employees, new forms of leadership and more agile workplace structures.
15
Table 2: Performance Criteria that Organisations Have to Meet
Source: Authors’ development, adapted from Morgan and Anthony (2008, p. 28)
A high performing workplace is one that manages well a growing portfolio of performance criteria and the tensions
these create for managers, executives and board directors alike. Businesses, for example, have to balance
competing objectives such as:
? efficiency versus creativity;
? standardisation versus delegation;
? accountability and control versus flexibility and responsiveness;
? alignment and ?culture fit? versus diversity in values and beliefs.
To handle such tensions and often competing objectives, workplace design and management practices have to
change accordingly. Such changes are a central theme of discussion throughout this report.
1.2. What is a High Performing Workplace?
High performing workplaces have variously been defined as ?high-commitment management? (Arthur, 1994;
Pfeffer, 1998), ?high performance work systems? (Becker & Huselid, 1998) and ?high-involvement management?
(Guthrie, 2001). Arundel et al., (2007) examine ?high-commitment‘ and ?high-involvement? management practices
across firms in 15 European countries. They identify four types of work organisation:
? Discretionary Learning Organisation – an adhocracy typified by high levels of learning and task complexity
with much responsibility allocated to the employee;
? Lean Production – a European adaptation of Japanese methods typified by low levels of employee
discretion in work design;
? Taylorist – a hierarchical design with low employee discretion, and low levels of learning and problem
solving; and
? Traditional – with simple management structures.
The Arundel et al. (2007) study finds that Discretionary Learning Organisations outperform Lean Production,
Taylorist and Traditional firms. A learning organisation has high levels of learning and task complexity with much
responsibility for decision making and problem solving allocated to employees. Furthermore, work is organised to
stimulate interaction between people with a diverse set of experiences and competences. This increases
1960s 1970s 1980s 1990s 2000s 2010s
Effective Effective
Efficient
Effective
Efficient
Productive
Effective
Efficient
Productive
Flexible
Effective
Efficient
Productive
Flexible
Creative
Effective
Efficient
Productive
Flexible
Creative
Sustainable
Knowledgeable
16
knowledge transfer and ensures that changes in customer needs and preferences are spotted and responded to
resulting in the continuous development of new competencies, products and processes. In short, learning
organisations are those firms that have transitioned from a hierarchical, top-down, approach to management, to
one where self-control, innovation and empowerment are of at least equal importance. Along similar lines, the UK
Commission for Employment and Skills (2009, p. ii) proposes that high performance working is ?a general
approach to managing organisations that aims to stimulate more effective employee involvement and commitment
to achieve high levels of performance?.
In this report, we propose that high performing organisations are those that:
? Excel at innovating and creating new products, services and business processes that meet, even
exceed, customer expectations and ensure organisational longevity;
? Achieve high levels of employee engagement
4
and quality of life for employees;
? Achieve sound levels of productivity and financial performance;
? Provide fairness
5
for people at work and for the stakeholders, customers and communities they serve.
A challenge to workplace leaders and others is how to achieve these objectives.
The Conceptual Map on p. 19 summarises some key factors for consideration. These have emerged from the
literature review (see section 2) and informed the design of the survey instruments and questions selected for this
study, as follows.
First, the map shows that leadership is important to firm performance. Leaders influence firm performance in two
ways: first, through their choice and design of management control systems and practices and, second, through
their influence on employee behaviour via behaviours such as, symbolic gesturing, leading by example, and
recognising achievements. As an example, transformational leaders are those leaders who continuously seek to
transform organisations in order to remain competitive. They delegate authority and decision making power and
their leadership style is one that recognises that bosses are not omniscient and require input from followers to
maximise decision effectiveness. Transformational leaders care about enabling others and seek to maximise the
potential and contributions of employees. We call this enabling leadership at all levels. It assumes that leadership
can be practised by people at all levels of organisational hierarchies providing they are given the opportunity.
Transactional leaders, in contrast, tend to favour more strongly the close monitoring of employee behaviours and
4
Engagement is a reflection of how people feel about their work/workplace. It is related to employee motivation, job involvement and feelings
of empowerment (see Carless, 2004). In this study, we measure engagement using Mowday and Steers (1979) 9-item scale on employee
commitment (see also Thomas & Velthouse, 1990). See the Employee Key Sheet for more details on the three constructs that form part of this
scale.
5
For the purpose of this study, we use Parker et al‘s (1997) scale on fairness and organisational justice. This measures: 1) organisational
fairness in allocating effort and distributing rewards (distributive justice); 2) the extent to which employees have an appropriate level of voice or
choice (procedural justice). Yet, fairness can potentially be about other workplace practices beyond distributive and procedural justice. It may
be related to issues, such as ?opportunity to take initiative‘, ?opportunity to fully use skills and abilities at work‘, and ?opportunity to lead change‘.
The employee survey explores these issues and seeks to provide more insights into what constitute fairness in the workplace.
17
This study proposes that high
performing organisations are those
that:
? Excel at innovating and creating new
products, services and business
processes that meet, even exceed,
customer expectations and ensure
organisational longevity;
? Achieve sound levels of productivity
and financial performance;
? Achieve high levels of employee
engagement and quality of life for
employees;
? Provide fairness for people at work
and for the stakeholders, customers
and communities they serve.
are generally more concerned with reducing deviations, monitoring of activities and ensuring conformity to
predefined intents (see section 2.1. for a detailed discussion of leadership).
Second, management control systems and practices impact employee behaviour and the collective capabilities of
the firm. Systems and processes erect boundaries for what is
‘acceptable? and ‘desired? behaviour at work. They are there
when leaders are ‘absent‘ or ‘distant? and this is often the
case, especially in larger and medium sized firms. The good
news is that senior leaders and managers have a wide range
of ‘design options? at their disposal and lots of ‘choice? as to
how to configure their management control systems and
practices. The challenge is deciding which configurations to
choose and predicting the effects they are likely to have.
Employees can, for example, be organised into hierarchies
and silos, or into temporary, organic team-based structures
that emerge in response to changing customer requirements
and particular projects. Similarly, remuneration systems can
be designed to reward financial results in a narrow manner, or
non-financial results (such as customer satisfaction) more
broadly. Different configurations have different impacts on
staff behaviour and firm performance (see sections 2.3 to 2.9
for detail).
The above two factors (leadership and management controls) result in the creation of a range of firm capabilities
and employee behaviours. Based on the literature review in section 2, and as a third point, we propose that high
performing organisations are those that:
? Have leaders who truly care about enabling others to be the best they can and who seek to maximise the
potential and contributions of employees at all levels of organisational hierarchies;
? Have a change-oriented culture where people value, welcome, and even seek transformation and
innovation;
? Excel at collaboration and partnering internally and with customers and other stakeholders;
? Enable employees at all levels to participate in strategy design and decision making;
? Are responsive to shifts in customer preferences, changes in the environment, competition, etc;
? Have high levels of problem solving capability, knowledge acquisition and learning by all staff;
? Maximise the use of the full range of employee skills and abilities;
? Excel at utilising and adopting information and communication technologies;
? Use management accounting controls – such as budgets, business plans, targets – to explore and
debate new and emerging business opportunities; and
? Monitor and respond to changing customer needs and interests.
18
The antitheses to these characteristics include silo based organisations, top down approaches to decision
making, low responsiveness to change, low levels of learning and knowledge acquisition, and managerial
dependence on tight controls. The proposed workplace survey will capture where firms sit on a continuum of
these dimensions.
Fourth, firm capabilities and employee behaviours affect firm performance in two ways. One is via the cognitive
path traditionally pursued by firms. This is where the firm seeks to take greater advantage of employee skills and
knowledge and, as a result, experiences better performance. A second path is the motivational path, where the
firm is concerned with the well-being and emotional connections of the employee. Highly engaged employees are
less likely to leave and more likely to exert greater effort and this can improve firm performance.
Fifth, there are spill-over effects from the workplace into an individual‘s personal life and general well-being.
Inevitably people think about work outside of their working hours and their well-being at work affects their well-
being at home and in society. We call this the employee‘s quality of life and measure this as the individual‘s
general well-being, health and self-esteem. The aim is to test whether employees in high performing organisations
experience a better quality of life.
In summary, this study examines how different leadership styles and workplace practices affect employee
behaviour and employee engagement. It measures their effects on firm performance, but also, importantly, on
employees‘ quality of life.
19
20
1.3. A Call for Reform to Work System Design and Management Practices in Australia
Not since the 1990s have policy makers in Australia paid co-ordinated attention to work system designs
and management practice. During the 1990s, government initiatives included the Karpin Commission
Report (1995), the Australian Workplace Industrial Relations Surveys (1995, 1990), and the Best Practice
Demonstration Program (Rimmer et al., 1997).
The World Economic Forum‘s Global Competitiveness Report (2009-10) shows that when benchmarked
against other nations, Australia currently lags behind in terms of business management and innovation
capabilities (see Table 3). For example, in the ?capacity for innovation
6
? category, Australia ranks number
26 whilst Japan comes in at number 1, with the Scandinavian countries following closely thereafter.
Furthermore, on ?business sophistication - nature of competitive advantage
7
?, Australia ranks number 38
after countries such as Panama, Indonesia and Sri Lanka (Germany is number 1). A number of reasons
for these lower levels can be suggested, including culture and leadership styles that inhibit employee
engagement, collaboration and innovation at the workplace level
8
.
Table 3: Australia’s Ranking: World Economic Forums Global Competitiveness Report (2009-10)
Where Australia does well (<10)
Rank
(out of 133)
Secondary enrolment 1
Time required to start a business 2
Life expectancy 3
Average (10-25)
Ethical behaviour of firms 11
Firm-level technology absorption 16
Degree of customer orientation 17
Extent of staff training 18
Quality of management schools 18
Where Australia does not do well (>25)
Capacity for innovation 26
Brain drain 26
Pay and productivity 33
Business sophistication - Nature of competitive advantage 38
Education expenditure 42
Female participation in labour force 47
Source: World Economic Forum’s Global Competitiveness Report (2009-10)
6
This is measured as follows: In your country, how do companies obtain technology? (1 = exclusively from licensing or imitating
foreign companies; 7 = by conducting formal research and pioneering their own new products and processes).
7
This is measured as follows: On what is based the competitive advantage of your country‘s companies in international markets?
(1 = on low-cost or natural resources; 7 = on unique products and processes) .
8
Gallup Consulting (2009) suggests that around 80 per cent of people in Australian workplaces are not ?fully engaged at work‘.
Whilst interpretations of this data should be made with some caution, the study highlights that low levels of engagement has a
substantial impact on national productivity, costing businesses over $33 billion a year.
21
Furthermore, a recent study of Australian manufacturing firms by DIISR (Green et al., 2009) found that
Australian firms lag behind their international counterparts on human capital management practices. Out
of 16 countries, Australia comes in number eight, behind the United States of America, Canada,
Germany, Japan, Poland, Great Britain and Sweden.
A focus on continually up-skilling workers is important to lift firm performance and address workplace
challenges, such as those outlined above, and undoubtedly training will continue to be a critical policy
lever going forth. However, the training and education reform agenda is not necessarily the lone solution
to lifting workplace performance. In fact, some Australian studies have found that employees‘ skills are
not being fully utilised by their employers. Examining the extent to which workers make use of their
existing skills at work, Watson (2008) concludes that skills are underutilised in some sectors by up to 40
per cent, with the average level of skills underutilisation being around 10-15 per cent. The UK economy is
facing similar challenges. The most recent UK Workplace Employment Relations Survey (Kelsey et al.,
2006), for example, found that over 50 per cent of UK employees surveyed thought the skills they
possessed were higher than those required to do their job. Research by Felstead et al. (2007) in the 2006
UK Skills Survey similarly found that ?opportunities for the use of abilities? (skills utilisation) and
?opportunities to use initiative? were of central importance to UK employees and ranked higher than ?good
pay?, yet these priorities were not being met by employers. This lack of full use of existing skills is partly
due to a failure of workplace leaders to effectively engage their employees. This realisation that people
are not always given the opportunity to contribute to their full potential at work may well be the biggest
?skills and productivity crisis? we face today.
Evidence, such as that outlined above, indicates that a market failure exists and that Australian work
system designs and management practices are in need of reform. This report suggest that true ‘fairness?
in the context of the world we live in today needs to be redefined beyond the important aspects of basic
terms and conditions of employment and protection for workers to one that ensures that each individual is
enabled and encouraged to contribute to his/her fullest potential at work. Much more can be done to
strengthen work system design and management practices for the benefit of Australian firms. Specifically,
a greater focus on employee engagement can be a key to unlocking productivity and transforming the
working lives of many people. If the potential that resides in our workforce was more fully unleashed,
policy makers and executives alike could see a steep change in workplace performance.
1.4. Who is Responsible for Creating a High Performing Workplace?
All people at work are responsible for lifting workplace performance and turning Australian workplaces
into higher performing places to work. Indeed, through collective and cross-sectoral efforts, Australia
stands a chance of becoming a world leader in work systems design and management practices. Yet, to
22
A high performing workplace
agenda is one that is monitored and
steered by Board Directors,
developed and accounted for by
Chief Executive Officers, and
actioned and practiced by all
members of senior leadership teams
and functional divisions (be it Chief
Financial Officers, Operations
Managers, Heads of Sales, Heads of
Marketing, Legal Counsellors and
others). A HPW agenda cannot be
mastered by HR Officers alone.
achieve such audacious goals, reform is required. Accountability and transparency need to increase,
mindsets and beliefs need to change, awareness has to be raised, and education curricula broadened.
Traditionally, the debate on high performing workplaces has taken place in human resources (HR)
divisions and offices. HR Managers have been encouraged to be ?strategic advisors? to the CEO and ?a
genuine business partner? (Becker & Huselid, 1998, p. 97). HR is to assume a strategic role that, first and
foremost, is a resource that solves real business problems (Ulrich, 1997). Research reports various levels
of uptake, with some success stories. In some cases, HR continues to be treated as a support function.
This needs to change if Australia is to push through workplace reform and lift workplace performance.
Furthermore, engaging employees and creating a positive shift in their decision-making powers and
discretion to lead change cannot be mastered by HR
Officers alone. All senior business leaders (Chief
Financial Officers, Operations Managers, Heads of
Sales, Heads of Marketing, Legal Counsellors and
others) play a critical leadership role in proliferating a
high performing workplace agenda and enabling more
people to contribute to their full potential. A high
performing workplace agenda is one that is monitored
and steered by Board Directors, developed and
accounted for by Chief Executive Officers, and actioned
and practiced by all members of senior leadership teams
and functional divisions.
Boxall and Macky (2009) explain that engagement with a
high performing workplace agenda is becoming more widespread across disciplines in academic
literatures. It now traverses economics, operations management, industrial relations, in addition to
strategic HR. The high performing workplace agenda similarly needs to be actioned across all functional
areas by practitioners. Boxall and Macky (ibid, p. 5) argue that ?narrowly conceived, bundling is seen as
an issue of design within the components of an HR system: making training consistent with a change to
self-directed teams, for example?. Broadly conceived, it entails complementarities between changes in
HR systems and other strategic changes in the workplace or productive unit. Complementarity does need
to be considered within the domain of HR policies and practices but, more importantly, it needs to be
understood within the broader management system of the workplace or business unit. For this to occur,
in a high performing workplace, every manager is a ‘people manager? and trained to lead, mentor,
motivate and enable people to contribute their fullest at work. This requires up-skilling of Australian
managers and leaders, including education and training curricula that extend beyond technical skills
development to include a much stronger focus on leadership and people management skills.
23
A study in the USA by Black and
Lynch (2003)
used data from the US
Bureau of Labour Statistics and
Worker Employer Surveys and found
that innovations to workplace
practices – such as re-engineering,
job rotation and organising workers
in teams – was an important
component of total factor
productivity and accounted for as
much as 30 per cent of output
growth amongst US firms; - that is,
up to one third of US output growth
stems from productivity-enhancing
innovations at the workplace level.
1.5. What are the Potential Benefits to Employers, Employees and Policy Makers of High
Performing Workplaces?
A growing body of research suggests that the quality of leadership, culture and management inside
organisations directly impacts on employee engagement, productivity and firms‘ capacity to innovate.
Black and Lynch (2003)
used data from the US Bureau of Labour Statistics and Worker Employer
Surveys and found that innovations to workplace practices in the USA – such as re-engineering, job
rotation and organising workers in teams – are important components of total factor productivity. They
account for as much as 30 per cent of output growth amongst US firms; that is, up to one third of US
output growth stems from productivity-enhancing innovations at the workplace level.
The UK Work Foundation‘s (2003, 2005) study, Cracking
the Performance Code, found that the best managed 30
per cent of UK companies achieve higher growth, sales
per employee, profitability and exports. The study also
found that increasing the performance of just 10 per cent
of companies in the bottom third to the average level
would add GBP 2.5 Billion to UK GDP and 0.25 per cent
to trend growth.
A London School of Economics / McKinsey (2007) study
of Managerial Practices and Productivity across 16
countries found that,
improving management practice is ... associated with
large increases in productivity and output. Across all the firms ... a single point improvement in
management practice score is associated with the same increase in output as a 25 per cent increase
in the labour force or a 65 per cent increase in invested capital.
A study on behalf of the Irish Government‘s National Centre for Partnership and Performance by Flood
and his colleagues (2008) found that adoption of a high performance work agenda (including strategic
HR) was associated with a 15 per cent increase in labour productivity, or EUR 44,000 per employee,
equivalent to EUR 12 million per median company. Good management practices were also associated
with an 8 per cent reduction in employee turnover, or the equivalent to the retention of an additional 2
employees per median company.
The Watson Wyatt study (2008/09), WorkUSA Survey, found that when employees are highly engaged,
their companies achieved 26 per cent higher labour productivity, lower turnover, and 13 per cent higher
returns to shareholders over a 5 year period.
24
There are additional social and economic benefits associated with improving leadership, culture and
management practices and lifting employee engagement. Engagement is not just about lifting
productivity, it is also importantly about creating personal wins and better working lives for the individual.
When individuals are engaged in meaningful work that provides positive emotional experiences, their
psychological well-being is enhanced. Research in the popular press and elsewhere shows that
engagement has numerous positive effects on employee health, well-being, and stress levels. MacLeod
and Clarke (2009, p. 14), for example found that engaged employees in the UK take an average of 2.69
sick days per year; the disengaged take 6.19.
The CBI [UK's top business lobby organisation] reports that
sickness absence costs the UK economy £13.4bn a year. Furthermore, employees who are absorbed in
their work (cognitively engaged) are more likely to have six key positive emotions at work (enthusiasm,
cheerfulness, optimism, contentment, to feel calm and relaxed) than negative ones (feeling miserable,
worried, depressed, gloomy, tense or uneasy) (MacLeod & Clarke, 2009, p. 60). Black (2008, p. 61)
author of an influential review of the Health of Britain‘s Working Age Population called Working for a
Healthier Tomorrow, similarly emphasised that, ?for most people, their work is a key determinant of self-
worth, family esteem, identity and standing within the community, besides of course material progress
and a means of social participation and fulfilment. Work stress can also have spill-over effects into family
and personal lives and cause people to behave poorly with friends or family members ( MacLeod &
Clarke, 2009, p. 30).
Sceptics have taken less kindly to the notions of empowerment, commitment and employee engagement.
Some view employee engagement as ‘capitalism in disguise? whereby firms can make more profit by
intensifying the work of employees. For example, Wilkinson (1998, p. 40) suggests that empowerment
can be a hollow term. He argues that ?most (initiatives) are purposefully designed not to give workers a
very significant role in decision making but rather to enhance employee contribution to the organisation.?
Webb (1995, p. 107), similarly, argues that, ?[...] they merely disguise an intensification of work, increased
surveillance and management over labour with cosmetic language of teamwork and personal
empowerment?.
MacLeod and Clarke (2009, p. 9) respond to such concerns by saying that, although improved
performance and productivity are at the heart of engagement, these cannot be achieved by a mechanistic
approach, which tries to extract discretionary effort by manipulating employees‘ commitment and
emotions. They (ibid) argue that employees will ?see through such attempts very quickly? and that this will
lead instead to cynicism and disillusionment. By contrast, engaged employees freely and willingly give
discretionary effort, not as an ?add on?, but as an integral part of their daily activity at work.
The evidence appears to indicate a strong link between workforce practices (including leadership, culture
and management) the wellbeing and fulfilment of people at work, and workplace productivity. This needs
25
not be a trade-off, or win-lose situation where employees lose out, but rather a situation where benefits
accrue to employees and employers alike.
In summary, better understanding and exploiting the link between high performing work system designs,
employee engagement and firm performance represents fertile ground and offers substantial potential
economic and social benefits to nations that enact change to this end.
26
2. Literature Review: High Performing Workplaces
This section reviews the literature on the leadership, culture and management practices that enable or
inhibit the achievement of improvements in productivity, innovation, employee engagement and fairness
at work. This then serves to identify questions for the three surveys (to CFOs, HR Managers and
Employees). The fields reviewed are: leadership, culture, human resources management, organisational
design, industrial relations, training, management accounting control and accountability, board
governance and information, communication and technology
2.1. Leadership
2.1.1. Introduction
In this section, we define leadership and describe different leadership styles identified in the research
literature. We then discuss a useful classification system for grouping the wide range of leadership
behaviours. Results generally show that transformational leadership style and behaviours are empirically
linked to high performing workplaces with there being a significant positive effect on organisational
performance (financial and other subjective measures), employee engagement, productivity and
innovation.
2.1.2. Typologies of Leadership Behaviour
In his well-respected book, Yukl (2009) describes leadership as a process whereby intentional influence
is exerted by one person over other people to guide, structure and facilitate activities and relationships in
a group or organisation. Nevertheless, there are differences among authors over a number of aspects,
such as who exerts the influence, the intended beneficiary of the influence, the manner in which the
influence is exerted, and the outcome of the influence attempt.
People at all levels of organisational hierarchies can lead change in the workplace, and there is a
persuasive argument that a high performing workplace is one where employees at all levels of
organisational hierarchies are encouraged, enabled and motivated to contribute to their full potential and
actively lead change and workplace transformation (Society for Knowledge Economics, 2009).
There are several leadership styles identified in the literature. By frequency of publications, the dominant
contemporary approach contrasts transactional and transformational leadership styles. This is also a very
pertinent distinction for examining the role of leadership in achieving high performance workplaces. As a
result, discussion of these two styles will form the basis of this review. Other, new theories of leadership
appear regularly, such as ethical, spiritual, servant, and authentic leadership (Yukl, 2009). However, none
have developed a similarly mainstream body of research.
27
Transformational leadership is
based on the recognition that
leaders are not omniscient and
require input from followers to
maximise decision effectiveness.
A key trait of strong leaders is their
ability to enable others to achieve
their full potential and to encourage
leadership at all levels of
organisational hierarchies.
Greater enablement of people at
work can lift employee engagement
and productivity. It can also
increase innovation by encouraging
diversity and lateral thinking
(Carless, 2000).
Transactional Leadership
Transactional leadership involves a give-and-take transaction, with leaders directing and monitoring
follower behaviours. In exchange, followers receive monetary reward for their effort (Avolio et al., 1999,
Elenkov, 2002). The essence and origins of transactional leadership draws on the origins of management
science. These origins include Taylor‘s (1911) theory of scientific management and the five core
leadership priorities of Fayol (1949, [1916]): planning; organising; commanding; coordinating and
controlling.
This early control orientation for leadership was supplemented by a greater people orientation during the
1920s and 1930s when the Human Relations Movement highlighted the impact of social relations and
employee satisfaction on employee productivity. Experiments on factory workers at the Hawthorne Works
(Roethlisberger & Dickson, 1939), followed by similar work by Mayo (1933), suggested that showing
concern for workers‘ needs may provide alternative avenues for raising organisation performance. As
such, the notion of the transaction between leaders and followers was expanded beyond simply being
financially rewarded for following directions, to also being
rewarded through the provision of attention and
recognition.
This dual focus continued within the literature as research
programs at Ohio State University in the 1950s found two
broad categories of transactional leadership behaviours
that researchers labelled ?initiating structure? and
?consideration? (Stogdill & Coons, 1957). Subsequently,
Blake and Mouton (1964) proposed their famous
?managerial grid? which described behaviour in terms of
?concern for production? and ?concern for people?.
More recently, Avolio and colleagues (see Avolio et al.,
1991, Avolio et al., 1999, Howell & Avolio, 1993) have
proposed three characteristics of transactional leadership
behaviours. They are; active management by exception (fault
finding and enforcing rules to avoid errors); passive management by exception (use of punishment for
unacceptable performance standards); and contingent reward (providing rewards, incentives and
recognition as a means to encourage the repetition of desired behaviours).
Transformational Leadership
The thinking behind transactional leadership was developed in a period where markets were relatively
stable and the focus of leadership was to manage operations consistently over-time. Transactional
leadership assumes that the leader possesses full knowledge of required behaviours, and the objective of
28
leadership is to direct and control follower behaviour. The latter half of the 20
th
century, however, has
seen increasing globalisation, innovation and competition. Leadership has increasingly been required to
change or ?transform? organisations in order to remain competitive, with the recognition that leaders are
not omniscient and require input from followers to maximise decision effectiveness. It is this more recent
focus upon organisational change that has lead to the development and current dominance of the
transformational theory of leadership.
Bass (1985), one of the original researchers on this topic, described the essence of transformational
leadership as:
(1) Making followers more aware of the importance of task outcomes;
(2) Inducing followers to transcend their self-interest for the sake of the organisation or team; and
(3) Activating followers‘ higher-order values (such as contribution to one‘s community).
In the broader literature (e.g., Podsakoff et al., 1996) the common characteristics of transformational
leadership have included:
(1) Communicating an exciting vision that appeals to the values of followers;
(2) Setting high expectations for performance;
(3) Being a credible role model by ?walking the talk?;
(4) Showing care and respect towards followers;
(5) Intellectual stimulation of followers by encouraging creative problem-solving; and
(6) Fostering collaborative behaviour among followers.
Transactional leadership encourages follower compliance through financial and social rewards and
punishments. In contrast, transformational leadership focuses on influencing follower behaviour by
increasing followers‘ belief in the importance of the goal, belief in their own abilities, trust in the leader,
and involvement in decision-making (Yukl, 2009; see also Carless, 2000).
Models of Leadership
There is widespread belief, particularly in popular management texts, that transformational leadership
rather than transactional leadership behaviours are more likely to generate high performing workplaces.
Nonetheless, the body of empirical research paints a slightly more complex picture. Indeed with both
transformational and transactional leadership appear to play important roles in achieving these desired
organisational outcomes (Elenkov, 2002; Howell & Avolio, 1993; O'Regan & Ghobadian, 2006,;Yukl,
2008). Firms have to both explore opportunities and innovate for the future, which is where
transformational leadership appears particularly relevant. Yet, they also need to exploit existing resources
for the present and this is where transactional leadership can play a role. Business managers therefore
face challenges over choices and priorities of approach.
29
In an effort to provide an overarching model of leadership, Yukl (2009) proposed a broad three-
dimensional classification of leader behaviours. Yukl labelled the three high-level categories of behaviour
as:
(1) Task oriented (planning, clarifying and monitoring);
(2) Relations oriented (supporting, developing and recognising); and
(3) Change oriented (being innovative and persuasive).
Such a typology has received support from Australian research (Langford & Fong, 2008) that found that
an extensive list of leadership behaviours factor analysed into three broad factors that the researchers
labelled as ?results?, ?people?, and ?change?. This shows the complex demands placed on leaders to
perform many roles and possess the flexibility to adapt to changing requirements and circumstances.
The categories of leadership, described above, show a link with Quinn‘s widely used model of
organisational culture, the Competing Values Framework (see section 2.2 below for more details). This
empirically supported model (e.g., Kalliath et al., 1999; Xingxing et al., 2010) poses four broad
orientations of organisations originally labelled as ?internal process?, ?rational goal?, ?human relations?
and ?open systems?. One can more simply label these as ?control?, ?results?, ?people? and ?change?
orientations. The control orientation is closely associated with transactional leadership. Various elements
of transformational leadership are associated with a change orientation (being visionary and innovative),
a results orientation (having high performance expectations) and a people orientation (showing care and
respect, communicating, and fostering collaboration).
For this study, we are less concerned with measuring transactional leadership. We recognise the
importance of transactional leadership and a control oriented (exploit focused) culture. Yet, we wish to
explore in more detail the extent to which leaders in Australian firms manage to achieve a healthy
balance between exploit and explore and whether a transformational leadership style has sufficient
presence in firms.
2.1.3. Linking Leadership to High Performing Workplaces
For the purposes of the current study, high performing workplaces are defined as those that result in
outcomes of innovation, productivity, high levels of employee engagement and fairness. As described in
the following sections, both transformational leadership, and in some circumstances transactional
leadership, have been positively linked to financial and other subjective measures of organisational
performance (Elenkov, 2002, Garcia-Morales et al., 2008a, Garcia-Morales et al., 2008b, Howell &
Avolio, 1993).
Employee Engagement
30
This survey uses the
Transformational Leadership
Scale by Carless (2000) where
leaders exhibit the following
behaviours:
(1) Have a vision
(2) Develop staff
(3) Give recognition to staff
(4) Involve staff in decisions
(5) Are innovative
(6) Practise what they preach
(7) Are worthy of respect.
To this we have added 3
dimensions for testing, including
leadership at all levels,
responsiveness to criticism and
people management.
Employee engagement is used to refer to a person‘s positive and constructive attachment to, involvement
in, and intentions toward their work and organisation. There is no widely accepted definition of
engagement, although general opinion is that engagement is an overarching construct that comprises
and integrates previously studied, self-reported employee outcomes (Macey & Schneider, 2008).
Langford and colleagues have demonstrated that organisation commitment, job satisfaction and intention
to stay are three empirically distinct components of engagement (Langford, 2009). Other constructs that
have been associated with engagement include citizenship behaviours, discretionary effort, and
proactivity (see the discussion articles in the same edition as Macey & Schneider, 2008).
Despite its importance as an outcome measure, there is limited published research linking leadership
with measures labelled as ?employee engagement? due, in part, to the recency and uncertainty
surrounding the construct of employee engagement. There
is, however, an extensive literature demonstrating the
impact of leadership behaviours upon components of
engagement such as commitment, satisfaction and
intention to stay. Of a broad range of possible cultural
contributors to engagement, trust in senior leadership has
consistently proven itself as one of the strongest
predictors of employee engagement (Langford, 2009;
Papalexandris & Galanaki, 2009; Podsakoff et al., 1996).
For example, using the ?Transformational Leadership
Scale‘ in a survey of 1539 employees and 1200
managers, Podsakoff et al. (1996) examined the link
between leader behaviours and components of employee
engagement (namely, satisfaction, commitment, trust and
citizenship behaviours). Participants were from the United
States and Canada, from a wide variety of industries (such
as financial, petroleum, and food) and company sizes. Leader behaviours that had a significant positive
effect on employee engagement included vision articulation, individualised support, providing an
appropriate role-model, and fostering acceptance of group goals. In particular, ?individualised support?,
reflecting the previously discussed people orientation, was most closely associated with employee
engagement and employee self-reports of performance. As the authors concluded (ibid, p. 290),
These results suggest that employees who perceive their leaders to provide individualised support
generally trust their leaders more, and are better ?sports‘, more satisfied, productive, altruistic,
conscientious, courteous, experience more role clarity and less role conflict, and exhibit more civic
virtue, than do employees who perceive their leaders to provide less support.
31
Productivity
A significant criticism of the enormous body of research into leadership, including that by Podsakoff et al.
(1996), is that the primary outcomes measured are employee self-reports of engagement-related
outcomes such as satisfaction, commitment and trust. Most of the studies that claim to show relationships
between leadership behaviours and organisational outcomes such as productivity and innovation levels
also unfortunately use employee self-reports of those outcomes. Of the hundreds of studies examining
the impact of leadership on outcomes, only a handful present empirical evidence confidently linking
leadership behaviours to objective measures of productivity. Summarising the existing literature in a
meta-analysis of 13 studies, Burke et al. (2006) examined the relationship between leadership
behaviours and independent team performance outcomes such as productivity (measured by the quantity
of items produced). They found evidence of the positive impact of both results-oriented and people-
oriented leadership behaviours on team productivity. The authors (2006, p. 303) concluded that the,
results suggest that both task- and person-focused leadership are almost equally important in team
effectiveness and explain significant amounts of respective variance in team productivity. ... This
result provides support for the recommendation that leaders need to be trained in both types of
behaviour as they both contribute and are needed for teams to be effective. . . [A further]
recommendation to those charged with leader development might be to pay special attention to the
development of boundary spanning [i.e., developing collaborative relationships with stakeholders
outside the team] and behaviours related to empowerment (i.e., coaching, feedback, monitoring,
participatory behaviour), as these two behaviours explained moderate-large amounts of variance in
team performance outcomes.
Innovation
Transformational leadership behaviours have been positively linked to workplaces that are described as
innovative (Garcia-Morales et al., 2008a, Garcia-Morales et al., 2008b, Gumusluoglu & Ilsev, 2009; Jung
& Chow, 2008; Jung et al., 2003; O'Regan & Ghobadian, 2006, Reuvers et al., 2008, Sarros et al., 2008,
Society for Knowledge Economics, 2008). However, results have been mixed regarding precisely which
types of behaviours are associated with innovative workplaces. For example, Sarros et al. (2008)
surveyed 1158 managers in the Australian private sector using Podsakoff et al.‘s (1990)
?Transformational Leadership Inventory‘ and found only two of the six transformational leadership factors
– articulating vision and providing individual support – were positively related to an innovative culture.
Articulating a vision involved behaviours such as seeking new opportunities and communicating plans to
followers. Individualised support involved behaviours such as showing respect for individuals‘ needs and
behaving in a way that shows consideration for the opinions and emotions of others. As Sarros et al.
(2008, p. 154) concluded,
Vision is a major facet of transformational leadership and is strongly associated with organisational
culture and innovation. . . A leader with vision creates a culture of change that facilitates innovation. . .
32
[However,] articulating a vision can achieve results only when its development involves those it is most
intended to influence – the workers and clients of the organisation.
As with the bulk of the literature examining leadership and productivity, however, the body of literature
examining leadership and innovation has focused upon self-reported subjective measures of innovation.
Within the scope of the current literature review, the authors were unable to find any studies that directly
linked leadership behaviour with independent, objective measures of innovation. This gap in the literature
provides a clear opportunity for the current study to contribute substantially to existing knowledge by
using objective outcome measures associated with innovation.
Fairness
To the extent that trust reflects an equitable environment, many of the studies cited above in the section
on employee engagement discuss the positive impact of leadership behaviours (in particular participative
and transformational behaviours) upon trust. Indeed, there is a growing literature examining the
relationship between fairness (typically measured as justice) and leadership, transformational or
transactional (van Knippenberg & De Cremer, 2008; Walumbwa, et al., 2008; Kirkman, et al., 2009).
2.1.4. Concluding Summary
Leadership is the process by which one person influences the behaviour of another in order to achieve a
specific goal. Transformational leadership theory is the dominant contemporary model of effective
leadership. It suggests that leaders are most effective when they communicate a challenging vision, show
care, foster creativity and encourage involvement in action-planning.
We focus on transformational leadership in the current study, and hypothesise that this leadership style
will be most effective to lifting workplace performance. We would expect to see an interaction between
leadership and organisational culture (and management practices in general), such that performance will
be higher when there is complementarity between leadership style and organisational culture that prevail
in the firm. That is, we would expect that a transformational leadership style will be more effective – in its
effects on organisational performance – in change-oriented cultures, whereas transactional leadership
styles will be more effective in control-oriented cultures.
2.2. Organisational Culture
2.2.1. Introduction
An organisation‘s culture is a shared set of values and practices, which have formed over time in
response to needs and influences of the organisation‘s internal and external environments (Hofstede,
33
Organisational culture is a shared set of
values, norms and underlying assumptions
(Schein, 1985).
Quinn and Rohrbaugh (1981) propose four
different kinds of culture, which assist in
achieving different business objectives:
? Control orientation (ensuring management
control and stability)
? Results orientation (achieving outcomes)
? People orientation (providing care and
collaboration among employees)
? Change orientation (striving for innovation
and responsiveness)
A high performing firm may need a
combination of these. Importantly, it is
aware of its orientation and how culture
contributes to creating business strengths
and weaknesses.
2003; House et al., 2004; Rousseau, 1990, Schein, 1985)
9
. Values are underlying beliefs and priorities
regarding certain states and outcomes, which influence more observable practices such as behavioural
norms and institutional structures. These, in turn, impact organisational outcomes such as productivity,
innovation, employee engagement, and fairness.
2.2.2. What is Culture?
Espoused versus Enacted Values
The literature draws a distinction between espoused and enacted values. Espoused values appear in an
organisation‘s explicit, formal declarations and those
of the organisation‘s senior management. Enacted
values are evident in organisational practices; they
shape the lived reality for all those within an
organisation. Gaps between espoused and
enacted values may arise because: (1) senior
management may not be consciously aware of the
enacted values of an organisation; or (2) espoused
values may reflect an attempt to shape perceptions
of stakeholders rather than directly describe
current reality. Enron is often used to demonstrate
the difference between espoused values (such as
Communication, Respect, Integrity and Excellence)
and enacted values (where overriding
management controls, such as the credit policy)
became common practice (Free et al., 2007).
Organisational Culture as a Control Mechanism
Culture is a mechanism for control. Employee behaviours are shaped through regular communication of
values and having those values reflected in behaviours that are selected, developed and rewarded.
Culture can create a sense of identity and belonging among an organisation‘s members, and these
feelings of identification and belonging can encourage commitment to the organisation. Shared values
and practices enhance social system stability by avoiding potentially disruptive conflicts of interest.
9
It should be noted that the focus of the current review is organisational culture, and as such, influential models of national culture,
such as Hofstede (2003), are not discussed here. Hofstede has explicitly argued that his dimensions are not appropriately applied
to organisational culture but despite his arguments, his dimensions appear in models of organisational culture such as the GLOBE
model discussed below.
34
Organisational Culture and Leadership
Culture is intimately associated with leadership. The initial culture of young organisations is shaped by
the founding leaders who demonstrate their values in the early selection, development and reward
practices of the organisation. These practices then shape the selection, development and reward of
future leaders in the organisation. Hence, an organisation‘s culture and leadership can become self-
reinforcing. If an organisation‘s culture is perceived to be maladaptive and needing change, such
transformation can be achieved in a couple of ways. The most outwardly dramatic and disruptive process
is the replacement of senior leadership with managers who have the desired values and behaviours.
This is quick and can be very effective. A less disruptive but also slower approach is to change the
selection, development and reward practices to reflect the desired values. This may entail, for example,
selecting people who are creative and willing to challenge if a more innovative culture is desired.
2.2.3. Models and Dimensions of Culture
The literature includes a wide range of dimensions of organisational culture. While no single model of
culture has widespread acceptance, substantial commonality allows for an efficient summary of the most
prominent dimensions. Table 4 presents three of the most prominent models of organisational culture,
with the dimensions in each model listed in separate columns. We present the table so that dimensions
that are similar across the different models appear in the same row. The four dimensions of the
Competing Values Framework, which we present in simplified terms, efficiently summarise the
dimensions . The model contains content related to:
1. Management control and stability (as indicated by the dimensions in the ?control orientation?
row);
2. Achieving outcomes (?results orientation?);
3. Caring and collaboration among staff and management (?people orientation?); and
4. Innovation and responsiveness (?change orientation?).
The efficiency of the Competing Values Framework enables briefer assessment and easier
communication than do the alternative models, while nevertheless providing a robust and popular tool for
action-planning. Therefore, we have chosen to use it for the current project.
35
Table 4: Dimensions and Similarities of Three Major Models of Organisational Culture
Competing Values
Framework
(Quinn & Rohrbaugh, 1981)
Organisational Culture
Profile
(O’Reilly et al., 1991; Sarros et
al., 2005)
GLOBE
(House et al., 2004)
Control
Orientation
(Ensure)
Internal Process Stability
Power Distance
Uncertainty Avoidance
Results
Orientation
(Exploit)
Rational Goal
Performance Orientation
Competitiveness
Performance Orientation
Assertiveness
People
Orientation
(Engage)
Human Relations
Supportiveness
Recognition
Social Responsibility
Collectivism
Humane Orientation
Gender Egalitarianism
Change
Orientation
(Explore)
Open Systems Innovation Future Orientation
Figure 1 overleaf presents an adapted version of the original model of Competing Values Framework,
showing the two axes theorised to underlie the four cultural orientations. With regards to the vertical axis,
Quinn and Rohrbaugh (1981) originally proposed that organisations differ such that some are more
organic, flexible and empowering (top half of the diagram), whereas others are more mechanistic,
ordered and goal-focused (bottom half of the diagram). On the horizontal axis, the model proposes that
organisations differ such that some are more externally focused, innovative and ambitious (right-side of
diagram), whereas others are more internally focused, stable and participative (left-side of the diagram).
The four orientations also reflect the evolution of management science discussed in section 2.1.2. Thus,
while early 20
th
century management focused upon ?control? and ?results?, the Human Relations
movement emphasised the impact of employee needs upon organisational performance (reflected in the
?people orientation? quadrant). Since the 1970s, there has been increasing recognition of the critical role
of change and innovation. In this regard, the model also reflects the move from transactional to
transformational leadership, with the older transactional styles of leadership reflected in the bottom-left
(mechanistic/internal) of the model whereas the newer transformational leadership appearing in the
upper-right (organic/external) of the model. Youngblood (2000) described these contrasting older and
newer cultures as ?classic? and ?quantum? respectively. Yet, high performing firms may well need a
combination of all of these cultures since they have to focus on exploiting existing resources for the
present as well as plan for the future.
It is thus important to recognise that no organisation fits perfectly into any one of the four quadrants in
Figure 1. All organisations vary in the extent to which they direct their focus across the four competing
quadrants, with all organisations inevitably and necessarily showing some elements of all four quadrants.
36
Figure 1: Competing Values Framework: Four Cultural Orientations
Source: adapted from Quinn and Rohrbaugh (1981)
2.2.4. Impact of Organisational Culture on Organisational Performance
There are logical connections between the four cultural orientations in Figure 1 and organisational
outcomes of innovation, productivity, engagement and fairness. Innovation is clearly most strongly linked
with the change orientation; productivity can be expected to be most strongly associated with the results
orientation and, perhaps, also the control orientation. Finally, we would expect employee reports of
engagement and fairness to be strongest in organisations with a strong people orientation.
Large scale empirical research on the impact of organisational culture on firm performance is sparse and
much that has been done is qualitative and anecdotal rather than quantitative. The empirical evidence
that exists suggests that linkages between organisational culture and organisational outcomes are
greater when outcomes are expressed with greater specificity. For example, studying 226 US
manufacturing firms and using the Competing Values Framework, Xingxing et al. (2010) found that
different aspects of quality management are associated with different cultural orientations. Having a
people orientation is most closely associated with quality of supplier relationships, whereas a results
orientation is more strongly associated with quality of customer relationships. Somewhat surprisingly,
neither the control nor change orientations show strong relationships with the measured quality
outcomes.
Mechanistic
Organic
E
x
t
e
r
n
a
l
I
n
t
e
r
n
a
l
PEOPLE
ORIENTATION
(“Engage”)
CHANGE
ORIENTATION
(“Explore”)
CONTROL
ORIENTATION
(“Ensure”)
RESULTS
ORIENTATION
(“Exploit”)
•Flexible
•Creative
•Visionary
•Caring
•Empowering
•Collaborative
•Hard-working
•Goal-focused
•Ambitious
•Controlled
•Ordered
•Stable
T
r
a
n
s
f
o
r
m
a
t
i
o
n
a
l
T
r
a
n
s
a
c
t
i
o
n
a
l
37
This study examines the extent
to which participating firms
have a change orientation
(‘explore’) culture that strives
for innovation and
responsiveness. The study will
assess the possible impacts of
such an orientation on firm
performance.
In an informative study examining the relationship between leadership style, organisational culture and
innovation, Howell and Avolio (1993) studied 78 managers across 78 firms and found that a
transformational leadership style only translates into innovation in organisations with a change
orientation. When cultural support for innovation is lacking, then transformational leadership behaviour
has no effect upon innovation. Similarly, studying 50 Taiwanese electronics and telecommunications
firms, Jung et al. (2008) found that cultures with higher change, people and results orientations, and with
lower control orientation, are all associated with innovation and facilitate the effect of transformational
leadership behaviour.
The Society for Knowledge Economics (2008) reported a case
study demonstrating Microsoft Australia‘s adoption of a
stronger people orientation and results orientation. Microsoft
Managing Director, Tracey Fellows, described the
organisation as moving from a Victim-Knower culture
(characterised by lack of accountability and unproductive
debate) to a Player-Learner culture (characterised by
increased individual responsibility and a greater willingness to
listen and learn from fellow employees). Tangible results associated with the culture change included
increased customer satisfaction and exceeding revenue growth targets.
Given discussion above, primary research questions for the current project include: (1) what impact do
different cultural orientations have upon different organisational outcomes within an Australian context?
and (2) to what degree is it necessary to align leadership styles and cultural orientations so as to
maximise organisational outcomes? With a particular focus upon innovation within Australia, (3) to what
extent do Australian organisations have a change orientation and what impact does such an orientation
have upon firm performance?
2.2.5. Culture Strength, Fit and Adaptation
Researchers have also investigated the extent to which these values and practices are common across
all employees (culture strength), there is consistency of purpose across all values, strategy, and practices
(culture fit), and the way cultures change over time (culture adaptation). An organisation demonstrating
high culture strength has a high level of consistency of that culture within and between different units and
departments. An organisation demonstrating cultural fit is one in which values and practices are clearly
linked with the overarching mission and objectives of the organisation. Finally, an organisation showing
adaptation demonstrates that, regardless of current strength and fit, it is able to respond effectively to
changing market conditions.
38
Culture Strength
Several writers (e.g., Gillespie et al., 2008) have argued that high organisational cultural strength may
predict performance because consistency of purpose and practice throughout an organisation will result
in a more efficient and focused allocation of resources. In contrast, others have argued that high cultural
strength may reflect excess adaptation to one set of goals at the cost of the capacity to adapt to an
alternative set of goals should environmental and economic circumstances demand such a change (e.g.,
Wilderom et al., 2000). There is, unfortunately, limited sound empirical research on this topic, but that
which exists suggests that the quality of culture – how well an organisation performs on each of the
above-mentioned dimensions of culture – is more important than the strength (consistency within and
between groups) of the culture (see Saffold, 1988).
The current project could contribute to our understanding of the impact of culture strength by examining
the level of variance in culture scores obtained from the managers and employees within each
participating organisation. Using a measure such as the standard deviation in culture scores within each
organisation, the project could examine whether low variance (indicating high culture strength) or high
variance (indicating low culture strength) better predict organisational outcomes such as productivity,
innovation, engagement and fairness.
Culture Fit
There is strong theoretical and anecdotal support for the importance of cultural alignment. This line of
argument suggests that the particular culture of an organisation should reflect the market conditions and
the strategic goals of the organisation. For example, an organisation in a stable and monopolistic or
oligopolistic market may achieve the most effective allocation of resources with a culture that has a
strong control focus. Conversely, an organisation which perceives its environment as rapidly changing
may more effectively allocate resources using a culture that has a strong change focus. The current
project could test such propositions by comparing the impact of culture upon performance for
organisations of varying sizes or industries. We would hypothesise, for example, that a control orientation
would be associated with higher performance for larger organisations with a substantial market share in
stable markets, whereas a change orientation may be associated with higher performance for smaller,
younger organisations in rapidly changing markets.
Culture Adaptation
While the concepts of cultural strength and fit may be useful in explaining differences between short- and
medium-term performance of firms, they do not explain why some firms with strong cultures manage to
adapt to sustain long-term high performance and others do not. Regardless of the strength or fit of an
existing culture, changes in market conditions may turn what were previously progressive cultures into
ineffective ones. Increases in competition, emergence of new technologies, changes in government
legislation – among many other rapid or subtle market changes – may nullify previously successful values
and practices. Hence, some authors have argued that only cultures that help organisations anticipate and
39
adapt to environmental change will demonstrate high performance over the long-term (Collins, 2009;
Collins & Porras, 1994; Kotter & Heskett, 1992). Adaptive cultures encourage risk-taking, initiative,
innovation, problem identification and problem solving. This adaptive perspective does not emphasise
change in any particular direction, but rather stresses the need to adapt corresponding to changing
market conditions. Using a sample of over 200 blue-chip companies across 22 industries, Kotter and
Heskett (1992) concluded that organisations that were effective over the long-term initiated change in
strategies and practices wherever necessary to satisfy the legitimate changing interests of all
stakeholders including shareholders, customers and employees. This study measures firms‘ flexibility and
responsiveness to change using Barringer and Bluedorn‘s (1999) scale of planning flexibility.
2.2.6. Concluding Summary
?Culture? refers to the values and practices shared throughout an organisation or work group. Culture
acts as a control mechanism, encouraging certain behaviours and discouraging others. Several types of
culture can co-exist. We propose using the Competing Values Framework (Quinn and Rohrbaugh, 1981)
given it provides a practical, efficient and scientifically robust model. This model proposes four primary
cultural orientations focused respectively upon control, results, people and change. In this study, we will
assess the dominant cultural orientations of participating firms and report on the the cultures that show
the highest level of firm performance. There is also an opportunity to examine whether different cultures
are more suited to different types of organisations (by different sizes, market conditions or sector).
2.3. Human Resources Management
The goal of HRM is to assist an organisation meet strategic goals through attracting, engaging and
retaining a high performance workforce (Gomez-Mejia, Balkin & Cardy 2001). In this section we review
the HRM literature showing that the methods used by a firm to manage its human resources can have a
substantial impact on many organisational outcomes including productivity, innovation, fairness and
employee engagement (Arthur, 1994; Delaney & Huselid, 1996; Huselid, 1995; Huselid, Jackson, &
Schuler, 1997; Lawler, Anderson, & Buckles, 1995; Nikandrou & Papalexandris, 2007; Ahmad &
Schroeder, 2003; Macky & Boxall, 2008; Green et al., 2009; Cogin & Williamson, 2010). An evaluation of
how an organisation can realise these benefits through bundles of HR practices is given as well as the
current state of HR in Australia.
2.3.1. HRM and High Performing Workplaces
Although the HRM functions in some organisations concentrate on operational issues, a growing number
of firms are pursuing a high performing workplace strategy (Lawler & Mohrman, 2003) that requires a
more strategic focus. Boxall (1998) suggests that HRM contributes to creating a high performing
workplace by providing a human capital advantage and an organisational process advantage. Human
capital advantage results from having better employees than competitors. This suggests that attracting,
40
This study examines the impact of
strategic and technical HRM practices
on firm performance.
Some examples of strategic HRM
practices include talent management,
building a flexible workforce and
creating a culture aligned with strategy.
Technical HRM activities relate to the
day-to-day delivery of people
management basics such as
administering benefits, maintaining
market-based salary grids, grievance
handling mechanisms, hiring entry level
employees and providing basic skills
training.
engaging and retaining the best employees is vital. Organisational process advantage comes from having
more effective ways of working than competitors, often gained through multiple HRM activities such as
aligning people to goals and values, creating effective working relations between individuals and teams,
collaboration, training, effective skills utilisation,
mentoring and an efficient human resource information
system.
Some researchers suggest that HRM should be viewed
as a central force in the development of distinctive
capabilities that help to create a high performing
workplace (Karami, Analoui & Cusworth, 2004). This
standpoint suggests that high performance comes
through the ?unique? blend of competencies,
knowledge, systems and resources on which an
organisation can draw (Barney, Wright & Ketchen,
2001). Further, tacit knowledge – such as
undocumented customer characteristics or preferences
– and social capital, developed through relationships with
key customers, stakeholders and within organisations which are held by employees, are hard to imitate
by competitors especially when skills are highly specialised and scarce (Coff, 1997; Colbert, 2004).
The next section reviews the configuration HRM needs to adopt to build high performing workplaces.
2.3.2. Reorganising HRM activities to create a high performing workplace
There is a growing body of evidence that HRM plays an important role in creating a high performance
workplace when more traditional operational HRM activities are handled by line managers, employees –
using robust self-serve technology - or outsourced. This allows HRM professionals to pursue more value-
adding roles which increase productivity levels and foster innovation and employee engagement (Barney,
et al., 2001). Although HRM is a functional specialist area, these organisations establish HRM
professionals as advisors and consultants, and not necessarily implementers (Wright, Snell & Dyer,
2005). In this context, it is likely that line managers are responsible for HRM policy execution. Boxall and
Purcell (2008) support this view, stating that line managers are regularly exposed to HRM issues, usually
hiring their own team and being held directly accountable for the performance of that team. In larger
organisations, there may be an HRM department equipped with specialist skills in such technical aspects
as the design of selection processes, formulation of policies, employment negotiations and training needs
analyses (Lawler & Mohrman, 2003). There may also be external HRM consultants contracted to provide
41
such important services as executive search, or assistance with major changes in performance
management and reward systems.
In the context of creating a high performing workplace, we adopt the view that HRM is an aspect of all
management jobs and not the exclusive property or responsibility of HRM professionals. It concerns the
behaviours and actions of all people managers. Therefore, the acronym ?HRM? refers to the totality of an
organisations‘ management of work and people and not simply to those aspects where HRM specialists
are involved. We now turn our attention to specific HRM responsibilities that enhance productivity,
innovation, fairness and engagement.
Huselid, Jackson and Schuler (1997) contrast technical HRM functions like recruiting, selection,
performance measurement, training and the administration of compensation, with strategic activities. A
strategic approach involves designing and implementing a set of internally consistent HRM practices to
support organisational innovations regarding corporate culture, team-based job design, building a flexible
workforce, succession planning, employee empowerment and talent management. Their study
investigated the impact of these different HRM activities on 293 U.S. firms. Results show that strategic
HRM activities are related to productivity, cash flow and market value of a firm. While technical HRM
activities are not directly related to firm level performance, these activities are still essential for
operational efficiency and employee commitment (Huselid, et al., 1997).
In support of this argument, Brockbank (1999) suggests that HRM provides a firm with a competitive
advantage when HRM activities operate at a strategic level (both proactively and reactively). For
Brockbank, strategic level HRM activities include creating a corporate culture of creativity and innovation,
managing change, facilitating a merger or acquisition, linking internal processes and structures with
ongoing market changes by developing technical knowledge, tactical skills and a culture consistent with
the demands of the business strategy. Brockbank (1999) also notes that a company needs to effectively
carry out operational level duties, even if these do not add value to an organisation. Those operational
HRM activities include the routine, day-to-day delivery of the HRM basics such as administering benefits,
maintaining market-based salary grids, grievance handling mechanisms, hiring entry level employees and
providing basic skills training (Brockbank, 1999).
In another study, Nikandrou and Papalexandris (2007) studied HRM practices that distinguished top-
performing firms from others during mergers and acquisitions. They found similar results and report that
successful companies are distinguished by the involvement of HRM in strategic decisions, development
of organisational capability through training and development activities, devolution of HRM activities to
line managers and creation of career and promotion paths within the organisation.
42
In a large Irish study, Flood et al. (2008) examine high performance work systems in medium to large
companies in the manufacturing and services industries. They set out to investigate the nature of
management and workplace practices in Irish-based private sector companies and to explore how such
practices are related to business performance outcomes. The study recommends that any company
aiming for high performance should adopt strategic HRM activities to foster innovation and productivity.
Flood et al. (2008) also found that the use of strategic HRM (as opposed to technical HRM) varies
significantly depending on the nature of the industry. Companies in the personal services sector reported
most extensive use of strategic HRM activities (64 per cent) while those working in health services have
the least extensive use (only 36 per cent). The use of strategic HRM activities was also linked with
workforce size. Companies with more than 500 employees are more likely to utilise strategic initiatives
than companies with fewer employees (58 per cent versus 45 per cent).
Scholars of strategic HRM point out that if a firm wants its HRM function to add value, it has to reorganise
that HRM professionals become full strategic partners within the business, responsible for achieving
strategic goals (Mabey & Salaman 1995). Essentially this means HRM being at the strategy table and not
on it. While this sounds reasonable, if managers responsible for implementing such a shift lack the
power, influence or strategic skills to make this happen, this will inhibit change (Lawler & Mohrman,
2003). A further challenge may be that the corporate culture of a firm has historically viewed HRM as a
support service department, engaged in only technical HRM activities. This makes the evolution of HRM
to strategic business partner more difficult (Brockbank, 1999; Ulrich, 1997).
2.3.3. Current State of HR in Australia
In Australia, a more strategic approach to managing people is a key factor differentiating HR of this
century with the last. Patrickson and Hartmann (2001) suggest that the paradigm shift has been driven by
the necessity for HR to contribute to corporate objectives. Flexible structures where project teams form
and disband as required either on one site or as virtual structures have been central to delivering value
(Patrickson & Hartmann, 2000). In an examination of HR in Australia, Walsh (2001) found that more
flexible working arrangements and hiring practices, investments in HR information systems and improved
understanding on measuring performance at the company, team and individual levels were key in
aligning HR strategy with corporate strategy and features of Australian HR practice (Walsh, 2001).
While recognising some advanced capabilities of HR in Australia, Patrickson and Hartmann (2001) go on
to conclude that there has been little evaluation of the outcomes of HR practice in Australia. In addition,
they state that further development of change management skills is needed. Specifically, assisting staff to
operationalise new strategic endeavours, forecasting skill demand and developing rapid response
systems based on flexible staffing procedures require attention.
43
Others are more critical in their assessment of the HR function in Australia and argue that there has been
low uptake of progressive human resource practices. These have been attributed to the existence of
protected domestic markets and the ?rigidities‘ of Australia‘s centralised industrial relations system
(Walsh, 2001). Indeed, Wright (1995) has observed the tendency of HR managers (who often have a
specialist industrial relations approach) to adopt a legalistic approach to people management.
2.3.4. Preparing the HRM function for the future
In a white paper on future challenges and issues facing Australian HR professionals, Wilson (2010)
reviewed the major trends likely to influence people at work by the year 2020. Wilson (2010) identified
how these challenges would impact workplace structure, performance and HR leadership. For example:
? There will be three very different generations in the workplace for the first time. The needs and
aspirations of Generation X and Generation Y are likely to prove very different from those of the
baby boomers, which have dominated the workplace for the last 20 years. Wilson (2010) also
notes that there had been little progress in the status of women in the professional workplace,
however predicted that successful organisations in 2020 will take on the personal challenge of
bringing talented women into management ranks and keep them there.
? The services economy is likely to globalise (possibly following the path of manufacturing during
the 1980s), creating a major change task and a much more complex management environment.
? A likely long-term structural labour shortage will lead to much more flexible working
environments, more organised to suit employee needs and desires. Flexibility will become the
key to attracting and retaining high calibre staff.
? The obsession with short-term shareholder value, which dominated the last decade, will be
replaced by a much broader perspective on the obligations of a company to a wider range of
stakeholders.
Wilson (2010) outlines four strategic priorities of HR professionals to assist their organisation to manage
its people through a difficult work environment created by the global financial crisis:
Priority 1 – Talent management, including attracting and retention of core talent.
Priority 2 – Maximise staff engagement and communication through a recession.
Priority 3 – An obligation of executives to lead by example in managing down costs of items such
as travel, accommodation, hospitality and ancillary expenditures.
44
Priority 4 – Carefully manage any downsizing.
In the next section, we turn to the research literature to identify specifically how HR practices can
contribute value to an organisation to deliver on these priorities.
2.3.5. High Performance Work Practices
In the HRM literature, a large body of research reports a positive linkage between high performance work
practices and firm-level performance measured by various indicators (Arthur 1992, 1994; Huselid 1995;
MacDuffie 1995; Delaney and Huselid 1996; Delery and Doty 1996; Snell, Youndt and Wright 1996). The
basis for high performing work practices largely comes from the universal perspective. This school of
thought argues that the deployment of a distinctive combination of HRM practices will always result in
superior organisational performance (Delery & Doty, 1996) and that these practices are effective across a
wide range of organisations, at different stages of development, in different strategic contexts and in
different industries (Pfeffer & Veiga, 1999).
The universal approach has appeal specifically to practitioners, who can readily learn from other
organisations or move across companies and business units with a ?tool kit? of HRM practices that are
widely applicable. Early management writers established the platform for this paradigm. Later, Peters and
Waterman (1982) were particularly influential, and the benchmarking/best practice movement has done
much to reinvigorate the popularity of this approach.
How can implementation of specific HRM practices generate such substantial benefits in productivity,
innovation, fairness and employee engagement? Pfeffer and Veiga (1999) argue that the gains occur
because employees work harder due to their increased involvement and commitment which, in turn,
comes from having more control and say in their work. People work smarter because they are
encouraged to build skills and competence, and they work more responsibly because more responsibility
is placed in the hands of employees at all levels in the organisation. Boxall and Macky (2009) explain that
high performing workplaces are first influenced by individual performance which in turn is a function of
interactions between employee ability, discretionary effort and performance opportunities. The authors
argue that the benefits to workers – like participation in decision making, skill development and wage
increases – need to exceed employee investments in their work before workers will be motivated to
upskill themselves and exert additional performance effort when opportunities arise. This is particularly
the case where those employee investments involve work-related stress and work–life imbalance.
The exact nature of the distinctive combination of high performance practices is a matter of debate.
Pfeffer (1998) argued that greater use of 16 management practices (which he later reduced to 7 – see
Pfeffer and Veiga, 1999) results in higher productivity and profit across industries and organisation types.
45
Pfeffer‘s seven universal components include: employment security, selective hiring, self-managed teams
and decentralisation as basic elements of organisational design, comparatively high compensation
contingent on organisational performance (gain sharing, profit sharing, stock ownership, pay for skill,
incentives), extensive training, reduction in status differences and information sharing (Pfeffer & Veiga,
1999). Similarly, Osterman (1994) argued that a number of work practices – such as teams, job rotation,
quality circles and total quality management – result in productivity gains for organisations. Ahmad and
Schroeder (2003) found a relationship between Pfeffer's (1998) seven universal practices and numerous
organisational performance measures across three industries and four countries.
Other studies report evidence linking high performance to HRM practices focused on enhancing
employee commitment via decentralised decision making, comprehensive training, salaried
compensation and employee participation (Arthur, 1992 and 1994). Conversely, HRM practices that focus
on control, efficiency, and the reduction of employee skills are associated with increased turnover and
poor performance (Arthur, 1992 and 1994). Macky and Boxall (2008) examined the relationship between
universal high performance work practices and employee attitudes. They found that high performance
HRM practices have a positive relationship between employees‘ work attitudes (job satisfaction and trust
in management), psychological identification with employers and intention to remain employed with their
organisations. Similarly, Huselid (1995) found that investments in HRM activities such as incentives and
compensations, selective staffing techniques, and employee participation result in lower turnover, greater
productivity and increased organisational performance through their impact on employee skill
development and motivation. Other studies suggest that comprehensive selection and training activities
are correlated with productivity and staff commitment (Terpstra & Rozell, 1993).
In the service sector there is little evidence on the application of high performance HR practices due to
occupational segmentation. A study of aged-care workers in Victoria, Australia by Harley, Allen and
Sargent (2007) indicated that high performance HR practices have positive outcomes for both skilled and
unskilled employees. These findings suggest that high performance HR practices may be applicable in
the service settings.
Most of the recent work on universal high performance HRM practices have found that bundles of
practices have more influence on organisational outcomes than individual practices working in isolation
(Shih, Chiang & Hsu, 2006; Lengnick-Hall, Lengnick-Hall, Andrade & Drake, 2009; Sung & Ashton,
2004). An underlying theme in this research is that firms should create a high degree of internal
consistency, or fit, among their HRM activities. As Baird and Meshoulam emphasise, a firm‘s HRM
activities ?must fit with and support each other? (1988, p. 122) if peak organisational performance is to be
achieved. In a review of HRM developments, Lengnick-Hall et al. (2009) conclude that high performance
46
This study uses Beltran-Martin et al’s
(2008) scale on high performing
workplace practice. This scale
incorporates an assessment of
employee flexibility (functional flexibility,
learning orientation and behaviour flexibility).
The increasing rate of dynamism in
competitive environments means that
measures of employee flexibility/
adaptability are an important
mechanism for explaining the
relevance of strategic and tactical HRM
practices to firm performance.
HRM practices are interdependent processes that should not be considered independently but as
complementary subsystems or bundles.
The logic connecting universal HRM practices and firm performance is intuitively appealing and
supported by theoretical arguments from a number of disciplines. From micro economics, human capital
theory suggests that people possess skills, knowledge and abilities that provide economic value to firms
(Tsang, 1987; Becker, 1975). In other words, increased productivity derived from human capital
investment depends on the contribution of employees to the organisation. A firm will invest in human
capital via HRM activities when these investments lead to higher individual productivity and overall
organisational level outcomes.
Although strong support for universal high performance work practices exists, there are differences
across studies as to what constitutes ?best? practices. In general, the activities identified by Pfeffer and
Osterman (YEAR??) have been labelled high
performance work practices. It is worth noting however,
that positive results in terms of productivity, innovation
and employee commitment appear to be reported
irrespective of the label assigned or of slight differences
in practices (Huselid, 1995; Delaney & Huselid, 1996
Arthur, 1994; Chadwick & Cappelli, 1998; Delery &
Doty, 1996; Ichniowski, Shaw, & Prennushi, 1993;
MacDuffie, 1995; Youndt, Snell, Dean, & Lepak, 1996).
Table 5 includes a summary of the practices prescribed
in the most notable research studies.
Despite the differences in Table 5, several themes emerge
across the studies. We have used these themes to guide the construction of this study. All of the studies
focus on enhancing the skill base of employees or attracting and retaining high performers through
training, job rotation or multi-skilling. Further, most studies promote new organisation designs that
include employee involvement in decision making, empowerment, participative problem solving and the
use of teams. Remuneration, incentives and reward systems also feature across studies as a vehicle for
attracting and retaining employees. In addition, grievance handling, dispute resolution and other
information sharing mechanisms are also prominent (see section 2.5 for more details). Therefore, in
testing whether universal HRM high performance practices contribute to the creation of a high performing
workplace we include a measure of recruitment/selection, developmental performance appraisal,
comprehensive training, competitive pay, participation in decision making, two-way communication and
job design.
47
Enlarging on this point, some scholars argue that organisations do not need to pursue all universal HRM
practices, and that some practices are suitable for some organisations and others are not (Cogin &
Williamson, 2010). HRM practices should vary according to various factors. In other words there will be
numerous factors which moderate the relationship between high performance HR practices and
organisational outcomes.
Beltran-Martin et al (2008) study HRM practices in 226 Spanish firms. Their work is embedded in the
?next generation? of human resource management and offers a deeper study of how and why HRM
practices affect organisational performance. This work is one of the first to examine the intermediate
mechanisms that explain the relevance of HRM practices for firm outcomes, where previous empirical
research has mainly focused on the direct effects between these variables. Specifically, Beltran-Martin et
al. (2008) argue that in modern company‘s proficiency in the performance of a set of assigned HR tasks
is not enough to guarantee competitive advantages. Aspects related to employee flexibility need to be
included in the new job performance standards. To this end, the study assesses degree of employee
flexibility and its impact on firm performance. Employee flexibility reflects levels of functional flexibility,
learning orientation (or skills malleability) and behaviour flexibility
10
. The authors find that HRM practices
mainly exert their influence on firm performance through employee flexibility. They note that ?HPWs no
longer affect organizational performance when HR flexibility has been controlled for? (p.1030). Possibly a
more correct way to say this is that HR practices do not have strong direct effects, but rather they have
indirect effects by influencing the level of employee flexibility, which in turn has a direct impact on
performance. The important point to note is that employee flexibility is one of the variables that contribute
to a deeper insight into the processes through which HR practices positively influence a firm
11
. The study
also illustrates the relevance of creativity and agility in organisational resources for the firm‘s performance
results.
Beltran-Martin et al.‘s (2008) study has practical implications. For example, when HR Managers
implement new people management strategies, they should take into account that employee flexibility
moderates the effect of HRM practices on firm performance. If this is the case, managers are encouraged
10
Functional flexibility assesses whether employees have the current skills and opportunity to switch between jobs and functions
within an organisation. Learning orientation (skill malleability) assesses employees‘ willingness to learn and focus upon continuous
skill development. Behaviour flexibility measures employees‘ ability and willingness to change their behaviour in response to
problems or challenges in the workplace.
11
There are a couple of other important studies that have considered the relationship between flexibility and HRM-performance
linkage (Wright and Snell 1998) and Bhattacharya et al (2005). These paper in particular point to the need to distinguish between
labour flexibility (skills, behaviour etc) and HR flexibility, by which they mean work also points to the ability to change an adapt HR
practices to suit different environmental conditions. In this sense, they are thinking about HRM as a dynamic capability of the firm,
not in the sense of thinking about adjusting workforce arrangements, as the term flexibility is generally used.
It should also be noted that the research focuses on a single employee outcome (HR flexibility) as a mediator variable, thus ignoring
the potential interrelationships between this variable and other relevant employee outcomes, such as employee commitment, skills,
or job satisfaction. All these variables are generally found to have positive effects on performance. This current study broadens the
view by measuring other variables such as employee commitment.
48
to check the design of the human resource strategies implemented in the firm. The most appropriate
approach is to target HR investments towards those practices that have the largest effect on employee
flexibility. Another relevant finding of interest for managers is the need to expand the job performance
concept in the firm by including HR flexibility–related questions, such as an employee‘s ability to engage
in broad, open-ended, and interdependent roles that differ from traditional notions centered on the
effective performance of a set of specified tasks. Aspects such as the provision of new ideas or the ability
to learn should become part of every employee‘s definition of performance. Similarly, there is an
opportunity to consider employee flexibility features when recruiting. This could come through
examination of a candidate‘s willingness to adapt to new circumstances in staffing processes by using
psychological tests or in-depth interviews.
In section 2.10, we review other contingency factors that moderate the effectiveness of high performing
workplace practices and give an example using HRM practices.
49
Table 5: Summary of Universal High Performance HRM Practices
Arthur 1992 Pffeffer & Veiga, 1999 Huselid, 1995 MacDuffie, 1995
Shih, Chiang &
Hsu, 2006
Zhang & Li, 2009 Green, 2009
USA USA USA USA Taiwan China Australia
Manufacturing Multiple Industries Multiple Industries Manufacturing Multiple Industries Pharmaceutical Manufacturing
-Broadly defined
jobs
-Employee
participation
-Formal dispute
resolution
-Information
sharing
-Highly skilled
workers
-Self managed
work teams
-Extensive skills
training
-Extensive
benefits
-High wages
-Salaried workers
-Stock ownership
-Employment security
-Selective hiring
-Self-managed teams
and decentralisation
as basic elements of
organisational design
-Comparatively high
compensation
contingent on
organisational
performance (gain
sharing, profit sharing,
stock ownership, pay
for skill, incentives)
-Extensive training
-Reduction in status
differences
-Sharing information
-Performance
appraisal
-Incentives
compensation
-Job design
-Grievance
procedures
-Information sharing
-Attitude assessment
-Labour /
management
participation in
decision making
-Recruiting intensity
-Training hours
-Promotion based on
merit
-Work teams
-Problem solving
groups
-Employee
suggestions
-Job rotations
-Decentralisation
-Extensive
recruitment and
hiring
-Contingent
compensation
- Status
differentiation
- Training of new
employees
- Training of
experienced
employees
- Team work
- Workers‘
involvement in
problem solving
- Information
sharing
- Performance-
based promotion
- Performance-
based pay
- Team-based job
design
- Comprehensive
training
- Formal training
- Job security
- Extensive
training
- Employee
participation
- Clear job
definition
- Result-oriented
appraisal
- The use of
internal career
opportunities
- Profit sharing
- Job security
-Instilling a talent
mindset
-Rewarding top
performance
-Addressing poor
performance
-Promoting high
performers
-Attracting high
performers
-Retaining high
performers
50
2.3.6. Concluding Summary
Most of the empirical work assessing the relationship between universal high performing work practices have
taken place in manufacturing firms or companies located in the United States (Bae, Chen, David, Lawler &
Walumbwa, 2003). Therefore, this study expands our understanding within an Australian context. The project
addresses the following research questions. First, we examine the impact of strategic and technical HRM on high
performing workplaces. Second, we investigate the effects of high performance HRM practices on productivity,
innovation and employee engagement. We look for individual effects of recruitment, selection, training,
performance evaluation, communication, job design, teamwork and competitive pay as HRM bundles and we
consider employee flexibility as a moderating variable.
We examined the research methodologies of a number of national studies in constructing this study. The National
Irish study on high performance work systems conducted by Flood et al. (2008) and Green et al‘s (2009) study on
Australia which collected data on HRM practices only from senior HRM professionals. Limiting data collection to
HR professionals is flawed as the views of those developing and implementing a HR strategy may be different to
the perceptions of those who experience the outcomes. For instance, HRM staff may believe that performance
evaluations create incentives for certain behaviours (such as high performance) but employees may interpret the
scheme as cultivating competition and inhibiting collaboration. In addition, the information that employees provide
allows for analyses as to whether HRM practices are working in the intended way – through, for example,
fostering innovation, engendering fairness, building commitment and enhancing productivity.
2.4. Organisation Design
2.4.1. Introduction
Organisational design deals with two main issues facing a firm:
1. How the tasks in the production process should be bundled into jobs; and
2. How communication and authority should be assigned to ensure the jobs are coordinated.
The performance of a firm, against a range of criteria – including, productivity, innovation, fairness and employee
engagement – are determined by a firm‘s organisational design and its interaction with the organisation‘s
incentive and performance evaluation practices, the skills and engagement of the firm‘s employees (HRM),
leadership, culture and the external business environment (Saloner et al., 2000).
Organisational design is constrained by two principal factors, dispersed information and bounded rationality:
? Dispersed information occurs because employees, performing various jobs, hear relevant information
about what customers want, prices and products of suppliers, or observe the behaviour of their co-
workers. Sometimes, they just have an idea about how to innovate (Stinchcombe, 1990). Effective
coordination of the firm‘s workers also requires decision-makers to possess as much relevant information
as possible;
51
? Bounded rationality refers to the fact that people have limited attention and limited mental capacity, and
as a result communication and decision making take time and are likely to be imperfect based as they are
on imperfect information (Radner, 1992, Stinchcombe, 1990, Van Zandt, 1998).
We first discuss the general issues surrounding the key dimensions of organisational design. We then review the
development of organisational design in the real world of the last century to see how these issues have played out
and the organisational solutions that have been found. We conclude by discussing a list of specific organisational
design questions facing firms, researchers and policy makers in the 21
st
Century.
2.4.2. Key Dimensions of Organisational Design
Allocation of Tasks into Jobs
As Adam Smith famously observed in the Wealth of Nations (1776), with his pin factory example, an individual
can produce more if they specialize in a narrow range of tasks rather than by trying to do everything themselves.
The reasons being that task specific skills develop more quickly with more frequent practice, greater quantities of
a task justify the extra cost of investment in more specialised equipment/training and switching costs of moving
between tasks are avoided.
In order to produce what people need, the division of labour into specialised tasks has to be coordinated either
through a market or through a firm. If the tasks are fairly independent then market organisation dominates,
however if there are complex coordination problems then the firm is the better method of organisation
(Williamson, 1987).
Firms have to decide how to bundle up the tasks in their production process into jobs. They want to reap the gains
of specialisation but by increasing specialisation, problems and costs of coordination also increase. The costs of
coordinating a large number of tasks include: lack of clear responsibility (Brickley et al.,2007); incentive conflicts
as workers act in their own interests (Hart & Grossman, 1983); delays (Radner, 1992); the extra cost of
managerial time (Radner, 1993), and decision-making on imperfect information (Simon, 1997).
Formal Authority: Levels of Management and Span of Control
The most obvious way in which the task/jobs in a firm are coordinated is through the formal authority structure; in
which a boss coordinates workers by telling them what to do. The problem is, that due to bounded rationality (the
finite cognitive abilities of humans), we are only able to effectively supervise a small number of subordinates. As a
result, we have the organisational design based on ?span of control‘, the number of subordinates who report to a
manager, or workers directly supervised by one. This number varies with the complexity of the interactions being
managed and the importance of speedy decisions, but in practice one person can manage only the smallest of
firms. Anything larger requires additional managers, typically organised into a hierarchy.
The number of levels of management in a firm is simply the length of the chain of command from the CEO or boss
to the ?shop floor? level workers (although in practice this number may not be unique). Span of control is the
52
number of subordinates who report to a manager, or workers directly supervised. For a fixed size organisation the
average span and the number of levels will be inter-related according to the formula
Number of employees = 1 + span + span
2
+ … + span
levels-1
.
Thus, increasing the span of control in a fixed-sized firm reduces the number of levels. In turn, this can speed up
decision-making as there are fewer levels of communication involved in making a decision. The trade-off is that
individual managers increasingly lose control as they become overloaded by larger spans of control.
Organisational Forms
Delegation of authority and the range of tasks controlled are both affected through the choice of organisational
form. At the firm level, larger organisations can make choices about divisionalisation; whether to organise
employees into divisions/departments on the basis of function (accounting versus sales), by product (business
advice versus auditing), by geography, by customer type (small versus large clients) or some mixture of all of
these. The appropriateness of a choice depends on the industry/technology and on a firm‘s product market
strategy. The main empirical finding is that a number of different organisational structures can coexist profitably in
the same industry. One school of thought, Organisational Ecology (Hannan & Freeman, 1989), emphasises the
parallels with biology where a number of species exploit the same resources (industry). At lower levels, or in
smaller firms, there is the choice of basing production on teams or individuals.
Ownership
The ownership structure has also been shown to play a role in the way a firm is managed, in particular with regard
to innovation. There are two main factors at work with ownership effects; information flows/knowledge, and
incentives. There is a large literature on how foreign ownership/foreign direct investment plays an important role in
the transmission of business knowledge which is not widely present in a local economy (OECD Oslo Manual,
2005). At the other end of the spectrum, a small, family-owned business may have quite limited access to
information about even the most generic of contemporary business practices or may have non-profit motives for
avoiding best practice (Colombo & Delmastro, 2008; Bloom & Van Reenen, 2007; Green, 2009).
Integration Mechanisms
As Nobel Prize winner Herbert Simon observed, an organisation cannot hope to deal with all the possible
interactions between all its tasks and its dispersed information. Thus in designing an organisation only the most
important interactions can be addressed through the formal structure. According to Simon‘s (1997, p. 240)
explanation of traditional industrial-era large organisations, ?…division of labour means factoring the total system
of decisions that need to be made into relatively independent subsystems, each of which can be designed with
only minimal concern for its interactions with others.?
Nevertheless, horizontal communication can still be desirable because formal organisational structure does not
negate the existence of important horizontal interactions between employees (Aoki, 1986). Indeed the
desirability of informal horizontal communication and coordination depends on the degree of interdependence
53
High performing workplace
practices are a bundle of
complementary practices that
essentially focus on greater
utilisation of workers through
empowerment rather than
control.
From an organisational design
perspective, the relevant
components of high performing
workplace practices are job
rotation, individual
empowerment, improved
communication and team-based
work organisation.
between activities. Thus, within-team communication will typically be important, and is one of the cornerstone
HRM techniques involved in the high performance workplace approach. It is harder to measure accurately the
informal horizontal communication that occurs between workers at greater distances within a firm (different
departments or even different divisions), across firms or higher in the firm between middle or even senior
management. There is evidence that these communication channels outside the formal hierarchy can have
positive effects. For example, Mendelson (2000) found closer interactions with external stakeholders improved
profitability in fast changing segments of the IT hardware industry (see also the discussion of social capital in
section 2.7).
The Distribution of Talent
In order to maximize firm performance it is typically considered that more able people should be assigned higher
in hierarchies. This applies in a range of contexts; maximizing employing effort (Calvo & Wellisz 1979; Qian, 1994;
Meagher, 2003), solving production problems (Garicano 2000), deciding/implementing new ideas (Prat 1997) or
general management activities (Rosen 1982). The traditional Marxist view was that more/better management
implied more exploitation of workers (Wright & Perrone,1977, Robinson & Kelly, 1979). However recent empirical
finding for Australia (Meagher 2001; Meagher & Wilson, 2004) and the US (Garicano & Hubbard, 2007) imply that
employee wages increase from more/better management.
2.4.3. Developments in Organisational Design: From the Assembly Line to the Knowledge Economy
A Brief History of Organisational Design
Advances in energy production and communication gave rise to the industrial revolution in the 19
th
Century,
ushering in the era of mass production. Workers were readily
available but had low skills in the new technologies. The
combination of low skills and mass production resulted in the first
kind of modern corporation based around Fordism and Taylorism
(Chandler, 1977). Both increased job specialisation and routinisation
and removed autonomy and decision-making from the shop floor to
management.
As job specialisation increases, the range of tasks performed by
each individual worker falls with a corresponding decrease in the
range of skills required of each worker. This tends to make workers
cheaper, because they require less training, and increases their
productivity more quickly as they more rapidly gain experience
through frequently performing the same tasks. In its most extreme
form this approach is characterised by Taylorism in which a firm makes
substantial investments in design of production processes in order to standardise and de-skill tasks
(Stinchcoombe, 1990).
54
Taylorism emphasises the control of workers. There is no need to inform workers about the running of the firm or
to listen to their ideas because firms invest heavily in engineering-based management to deal with factory design
and operations. Management follows the structure of the formal hierarchy with authority concentrated at the top.
The first example of the power of organisational design was General Motors (GM) transcendence of Ford through
Sloan‘s multi-divisional form (M-form). The M-form decentralised the choice of new models to divisional managers
at GM fostering greater innovation and designs closer to the tastes of customers (Stinchcoombe, 1990).
Accelerating technical progress, higher education levels, more demanding consumers, increased international
trade and the beginnings of globalization resulted in an increasingly dynamic and uncertain business world in the
1970‘s and 1980‘s.
As our Introduction explains (section 1.1), new times require new organisational forms and practices. For
example, in the 1980s, the Japanese car manufactures emerged as a major international force. They were able to
achieve lower costs than their US competitors on smaller production runs. They were also more flexible, profitably
switching the production of a factory between different vehicles in response to consumer demands. In this, they
combined lean manufacturing and team-based quality practices.
More recently, the movement to a knowledge-based economy in developed nations has heightened the pressure
on firms to find successful organisational designs. Those seeking to create high performing workplace practices
have experimented with a bundle of complementary practices that essentially focus on greater utilisation of
workers through empowerment rather than control (see also HRM section 2.2.3) . From an organisational design
perspective the relevant components of high performing workplace practices are job rotation, individual
empowerment, improved communication and teams. Training, recruitment and motivation of workers are also
crucial for making these organisational design elements work (as discussed in sections 2.3 on HRM and section
2.6 on training).
2.4.4. Key Aspects of Modern Organisational Designs
Job Rotation and Multi-skilling
A number of problems emerged (Brickley, 2007) from Taylorism's emphasis on narrow specialisation including: (i)
worker boredom resulting in a lack of motivation; (ii) workers focusing only on their own tasks and ignoring the
wider consequences of their actions; and (iii) bottlenecks in which a firm is vulnerable to the behaviour of key
employees located at critical points in the production process who were not easily replaceable. A solution to
these problems, championed by Japanese-style management, is job rotation.
Under job rotation, workers periodically move to new jobs at the same level within the firm. In using job rotation a
firm must balance out the disruption from having a worker learn a new job (and establish new workplace social
networks) with the gains from avoiding boredom and having a more flexible workforce. There is now a
considerable literature demonstrating the value of job rotation as part of a package of modern HR techniques, see
for example Ichniowski, Shaw and Prennushi (1997).
55
The benefits of job rotation go beyond the greater engagement workers experience through more interesting jobs
(Lazear, 1998). Communication between workers is easier when they understand each other‘s roles.
Understanding the bigger picture helps foster innovation. Being trained for multiple jobs in the firm indirectly
fosters innovation by reducing the risk for workers that they will innovate themselves out of a job. Many of these
benefits do not require that workers rotate between jobs, only that they have been trained to perform the other
jobs; multi-skilling.
Individual Empowerment
A flexible production process by definition is not one carefully designed according to Taylorism (so that workers
are derived of all discretion and autonomy). If a firm is to frequently switch its production then workers will have to
be empowered to solve or innovate in the face of the new problems that emerge with each new project. Workers
will be better able to chose the best solution/innovation if they are better informed about what the company is
doing, i.e. more transparency and communication of information down the organisation. As workers become more
empowered and as more mechanistic or bureaucratic production controls weaken, the challenge for management
is to align employee interests with those of the company. Explicit financial solutions include employment security
and profit- or gain-sharing arrangements. All of these changes have the added benefit of making jobs more
engaging for workers; indirectly increasing their motivation (Stinchcombe, 1990).
Self Managing Teams
Coordination becomes more of an issue as workers become more empowered because they now possess a
greater share of relevant information than their bosses. One solution that has become a core element contributing
to high performing workplaces is to group workers into teams that communicate internally and make their own
coordinated decisions (within variable limits). Appropriate incentives, in the form of group-based performance
assessment and remuneration, are important for motivating appropriate behaviour and desired outcome from
workers in these teams (Lazear, 1998).
Boning, Ichniowski and Shaw (2007) report a longitudinal study of production lines in U.S. minimills. They analyse
the adoption of problem-solving teams and group incentive pay and their effects on productivity. While group
incentives are widely used, problem-solving teams are found almost exclusively in lines with more complex
production processes. They found that group incentives increased productivity in all lines, while problem-solving
teams raise productivity in lines with more complex production processes.
This evidence indicates that teams give workers a valuable opportunity to solve problems in more complex
production processes, while standard operating procedures appear sufficient otherwise.
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In the matrix style organisation,
employees have a permanent
functional boss who overseas their
career progression, training etc as
well as a series of project managers
as they progress between project
assignments (Brickley et al., 2007).
In organisational forms that are
referred to as organic or ad hoc, the
notion of a permanent direct boss
disappears all together and
temporary authority structures
emerge in response to changing
customer requirements and the
needs of each project (Arundel et
al., 2007).
New Organisational Forms
Self-managed teams are just one aspect of organisational forms that have been occurring as part of modern
organisational design. Car manufacturing teams tended to be stable, making incremental innovations, due to the
nature of the production line technology. However in many
service sector industries more flexible project-based teams
work on one off projects. This produces a range of new flexible
organisational forms in which permanent vertical authority
plays a much smaller role in management. For example, in
matrix style organisations, employees report to a permanent
functional boss who oversees their career progression and
training but also to a series of project managers as they
progress between project assignments (Brickley et al., 2007).
In organisational forms that are referred to as organic or ad
hoc, the notion of a permanent direct boss disappears all
together and temporary authority structures emerge in
response to the needs of each project or changing customer
requirements (Arundel et al., 2007).
Flattening Hierarchies
Increasing the span of control reduces the number of levels and this constitutes the process of ?organisational
delayering? observed over recent decades. This process generally seeks to create more ?agile? organisations that
have faster decision making. Empirical studies have indeed found greater use of flatter hierarchies in more
competitive environments, in which quick action is generally held to be the most valuable.
Colombo and Delmastro (2004) investigated the relationship between the allocation of decision-making authority
and internal aspects of an organisation's structure using a survey of Italian manufacturing firms. Guadalupe and
Wulf (2008) investigate the impact of globalisation on the number of layers between division managers and the
CEO and the number of positions directly reporting to the CEO. Both find flattening as a trend in recent years, and
most strongly in more competitive industries.
If one thinks of innovation as the whole process from having an idea through to implementation, then flattening of
hierarchies should be positively associated with greater successful innovation, not because flatter firms produce
more ideas but because they can implement them more quickly, increasing the likelihood that the innovation will
be successful.
A flatter organisation can also be an indirect sign of greater decentralisation because, everything else constant, a
manager can only handle more subordinates if they are less involved in the details of their subordinates‘ actions.
This means that the subordinates have more decision authority (either formally or in the real sense that their boss
is unlikely to overrule them because the boss is too busy). This kind of delegation should be desirable in firms that
57
This study measures the degree
of (de)centralisation of employee
decision making.
Delegation of authority can
improve firm performance by
speeding up decision making,
reducing delays in customer
responses, freeing up
management’s time, increasing
employee innovation efforts and
engagement levels.
also find delegation to self-managing teams profitable, and a study by Colombo and Delmastro (2008) supports
this prediction.
Delegation of Authority
Delegation has a number of advantages in terms of both firm and employee outcomes, including:
? Relocating decisions to a better informed subordinate. However Prendergast (2002) points out the better
informed subordinate will need appropriate incentives to
utilise their information and there is some empirical support
for this issue (see Nagar, 2002; DeVaro & Kurtulus, 2007;
and Wulf, 2007);
? Speeding up decision-making by (i) reducing delays from
communication since chains of command are shorter (Van
Zandt, 2003, Meagher et al., 2004) or (ii) by freeing up
senior management time to work on time sensitive
problems (Meagher & Wait, 2008);
? Increasing innovation effort by employees since their ideas are
more likely to be implemented (Aghion & Tirole, 1997; Acemoglu et al., 2007; Zabojnik, 2002; and Bester,
2004);
? Employees with more interesting jobs becoming more involved and engaged.
Delegation can also have significant disadvantages:
? Lower level employees do not have the appropriate skills to handle increased responsibility. This can be
solved through expending more resources on training, succession planning and recruitment;
? Poor coordination between different parts of the company;
? Failure to reap economics of scale in decision making (cost savings from applying decisions across
multiple plants), as highlighted by Meagher and Wait (2008).
Meagher and Wait (2008) using comprehensive Australian data find that workplaces that face a competitive
product market are more likely to delegate decisions about major innovations to the workplace, rather than to
centralise decision making to a higher level of the organisation. Similarly, workplaces that export their product are
more likely to decentralise decision-making rights. Delegation is more likely with larger workplaces, on the other
hand, centralisation of decision-making is more likely when there are other workplaces in the organisation
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A high performing organisation is
one that rapidly responds to
changes and opportunities in its
external environment (such as a
shift in customer needs) by
adjusting its internal activities
and efforts.
This study surveys firms’ capacity
to respond to shifts in external
markets using Barringer and
Bluedorn’s (1999) planning
flexibility scale.
performing the same task, and when the product market is unpredictable. Similar results are found in Acemoglu
et al (2007) for the UK. Unfortunately neither dataset contains good productivity/performance information so it is
not possible to determine the impact of these organisational design choices.
2.4.5. Current Trends: Importance of Agility and ICT Investment
Agility and Responsiveness to Change
A fundamental tenant of strategic management is that both a firm's external and internal environments need to be
considered in an optimal managerial design (Saloner, Shepard, &
Podolny, 2000). Given the world is an ever changing place a large
part of the success of a firm is determined by the effectiveness with
which it makes rapid decisions in response to changing conditions. A
survey of 349 executives from around the world (Glen 2009) found
that 61 per cent rated ?Rapid decision-making and execution? as a
critical trait of an agile organisation – significantly ahead of any other
trait. While a speedy response to most changes in the business
environment will increase productivity, this is especially true in the
area of innovation. Innovation frequently provides the innovator with a
first mover advantage. The first mover advantage can be due to legal
barriers like patents, but even absent patents. Being a first mover tends
to frame consumer perceptions (competitors are copies and not authentic) and generates a base of established
customers who find it costly to switch (Besanko et al, 2009). Importantly, a high performing organisation is one
that rapidly responds to changes in its external environment by adjusting its internal activities and efforts. In this
study, we survey firms‘ capacity to adjust to external shifts using Barringer and Bluedorn‘s (1999) planning
flexibility scale.
The Impact of Information and Communication Technology
The most conspicuous change in most workplaces in recent decades has been the massive adoption of
innovations in Information and Communication Technology (ICT). There is a well-developed body of
macroeconomic evidence indicating that those industries making more ICT investments have seen greater
productivity growth (Jorgenson, Ho & Stiroh, 2003; Oliner & Sichel, 2000).
It has been argued that the failure to adopt the appropriate organisational restructuring associated with IT
investments explains part of the US-Europe productivity gap of recent years. Two firm level studies confirm this to
some degree. Bloom, Sadun and Van Reenen (2007) found that US multinationals operating in the UK do have
higher productivity than non-US multinationals in the UK, and that this is primarily due to the higher productivity of
their IT. Furthermore, establishments that are taken over by US multinationals increase the productivity of their IT,
whereas observationally identical establishments taken over by non-US multinationals do not. Within the valve
making industry, Bartel et al. (2009) found that US firms adopted new IT faster than the UK firms (perhaps due to
59
smaller scale and greater unionisation in the UK). However, once IT and the associated HRM changes were
made in the UK, productivity in UK valve firms was the same as in the US.
Although investments in IT and appropriate organisational restructuring appeared to raise productivity and hence
the well-being of society in the long run, in the short run there will be both winners and losers. Shareholders and
high skilled workers are likely to benefit but low skilled workers are likely to see a decrease in demand for their
labour from the skill-biased organisational change associated with IT investments.
Bloom et al (2009) make an interesting advance by separating the impacts of information technologies from those
of communication technologies. Information technologies that reduce information costs enable agents to acquire
more knowledge and ?empower? lower level agents. Conversely, technologies reducing communication costs
substitute agent‘s knowledge for directions from their managers, and lead to centralisation. Their international
analysis of 7 European countries and the U.S. examines the impact of ICT on worker autonomy, plant manager
autonomy and spans of control. They find that better information technologies (Enterprise Resource Planning for
plant managers and CAD/CAM for production workers) are associated with more autonomy and a wider span of
control. By contrast, communication technologies (like data networks) decrease autonomy for both workers and
plant managers. Section 2.9. will explore ICT and workplace performance in more detail.
2.4.6. Organisational Design and High Performance Workplaces of the Future: What Works at Work?
Organisational design is one of the most conspicuous aspects of any firm – every worker experiences the local
allocation of tasks and authority every day. However, how organisational design can best contribute to high
performance workplaces in an economy increasingly shaped by advances in ICT and operating at an ever faster
pace, is an open question. Our expectations are also more demanding. We want rising productivity but also more
innovation, greater fairness at work, more employee engagement and improved employee wellbeing. There is no
shortage of potential solutions; indeed managers, researchers and policy makers must now sort through a
multitude of ideas to determine which combinations might work best. A comprehensive evaluation is especially
pressing for service industries, which despite being the largest sector in the economy, have been neglected by
research in favour manufacturing.
The preceding review of contemporary developments in organisational design suggests the following list of
organisational attributes whose contribution to performance should be evaluated empirically for the services
sector:
? who reports to whom;
? who makes decisions;
? who do they work with - do they work in teams and how do they work in teams;
? who do they communicate with;
? who they learn from within and across organisational units and outside the organisation;
? speed of decision making;
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? awareness of change in the business environment;
? ability to work with these environmental changes to effect organisational responses or initiatives;
? organisational design to maximise returns on ICT investments, and vice versa.
2.5. Industrial Relations
2.5.1. Introduction: Industrial Relations as a Field of Research and Practice
Industrial relations (IR) concerns the study of the employment relationship, including the dealings between the
management of a firm and its employees. A fundamental assumption of IR is that when labour markets are
imperfect, and when the employment relationship includes conflicts of interest, then one cannot rely on markets or
managers to serve workers‘ interests (and in some cases to prevent worker exploitation). Industrial relations
scholars and practitioners therefore support interventions, institutional and other, to improve the workings of the
employment relationship and to protect workers‘ rights. Such improvements can be approached from a range of
perspectives: economics, sociological, psychological, political, legal and others.
Furthermore, IR stretches from individual decisions – like absenteeism or rostering, through the workgroup level,
and into workplace and organisational-level phenomena. In this, it shares much with overlapping fields such as
HRM and organisational studies (OS) – including organisational leadership, culture and design. In recent years,
many IR scholars have embraced a much greater engagement with the perspectives of these other fields. This
has generated combinations of HRM and IR into ?employment relations? and this approach appears to have
contributed to interpenetration of ideas between the two fields (Boxall & Dowling, 1990; Gardner & Palmer, 1997).
Another central defining element of the IR field is that it accepts, as legitimate, employees having independent
collective representative voice in relation to their world of work, typically through a union and access to collective
bargaining (Kaufman, 2004). In minimalist terms, this has international expression through International Labour
Organization Conventions 87 (freedom of association) and 98 (right to organise and collective bargaining). These
meet notions that the world of work in a modern, democratic society needs to provide mechanisms for expressing
and managing grievances, formulating and channelling employees‘ collective demands over their employment
and their work, and that these need a degree for independence from both employer and the state (McCallum,
2005).
Traditional IR research in the Anglophone world has tended to appear particularly concerned with the regulation of
the employment relationship through unions, collective bargaining, legislation and, in Australia, through systems
of conciliation and arbitration. The resulting IR treatment of high performing workplaces therefore has tended to
be, in some senses, narrower than that in HRM or OS.
Yet, unionisation and collective bargaining have suffered steep declines in the UK, Australia and New Zealand
since the 1980s, and sustained employer hostility and marginalisation even longer in the USA. As well, in
Australia, the tribunals that were, for nearly a century, the focal points of systems of conciliation and arbitration
are, since 1997, pale shadows of their former selves (Dabscheck, 2001). In all these countries, the sphere of
61
union influence through collective bargaining has shrunk to cover the minority of the workforce (Kaufman, 2004;
Bamber & Sheldon, 2007, p. 612-15). A partial exception to this is Australia. Here, an award system – even if
greatly reduced – together with the national minimum wage and other conditions continue to extend elements of
union influence to sections of the workforce otherwise untouched by union membership and activity (Murray &
Owens, 2009). Nevertheless, this influence remains much less than it was before the implementation of the
Workplace Relations Act 1996 (Sheldon, 2008).
For these reasons, IR researchers in Anglophone countries often see the relationship between IR and the high
performing workplace agenda through the lens of its impact or potential impact on unionisation, union power,
collective bargaining and employment rights. This has generated different approaches to those apparent, for
example in many European countries, where unionism and collective bargaining maintain both strong coverage
and enduring social legitimacy, or where legislative or policy-based ?extension provisions? carry collective
bargaining gains that unions make into non-unionised (and non-bargaining) organisations.
Another factor encouraging differentiation is that in many of the non-Anglophone advanced economies, works
councils provide employees with a dual channel of collective voice and representation. By statute, works councils
give employees access to consultation and participation rights that, in the Anglophone world, are still largely the
stuff of advocacy and prescription (Markey, 2002). This also means that how the high performing workplace
agenda does or should interact with IR remains a much more unsettled question in the Anglophone world where it
continues to generate widely diverging interpretations. Later sections will canvas these points more fully. It is first
necessary to discuss briefly the content of those practices that make for an organisation that is high performing in
areas like productivity, innovation and employee engagement.
2.5.2. Management Practices and High Performing Workplaces
In its current use, as for HRM, there is general agreement within the IR field that high performing workplaces
result from some combination of what Bryson et al. (2005, p. 460) define as,
task-related practices, which aim to maximise employees‘ sense of involvement in their work, and human
resource management (or personnel) practices that aim to maximise employees‘ commitment to the wider
organisation. (our italics)
Core areas for management action on the high performance agenda include organisational innovations, such as
autonomous teams, training for multi-skilling and communication skills. These require support from employee
participation practices – like timely information disclosure and problem solving groups – and from employment
practices such as job security, internal promotion and, perhaps, performance-related pay. For Kalmi & Kauhanen,
(2008, p. 431), this can be summarised as ?participation, incentives and skills?. Participation and incentives can
also relate to the idea of workplace fairness, one of the criteria in this study of what constitutes a high performing
workplace.
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This study measures fairness using
Brashear et al’s (2005) scale on
distributive and procedural justice. This
assesses:
1) Organisational fairness in
allocating effort and distributing
rewards (distributive justice); and
2) The extent to which employees are
fairly treated with regards to
procedures and processes
(procedural justice).
Across the fields of IR, HRM and OS, definitions of ?fairness?, sometimes also referred to as ?organisational
justice? are often related to employee perceptions of several components (Parker et al, 1997; Brashear et al,
2005). For the purpose of this study, we focus on distributive and procedural justice, as follows:
a. Organisational fairness in allocating effort (contributions) and distributing rewards (distributive justice);
b. The extent to which employees are fairly treated with regards to procedures and processes (procedural
justice).
According to Fields (2002, p. 163), the literature ?starts from the premise that employees focus on the fairness in
organizational systems in determining their commitment, satisfaction, and intent to turn over.? Employee
commitment and satisfaction contribute to employee
engagement, one of the important variables identified for this
study of high performing workplaces. High levels of intent to
turnover indicate a low performing workplace. The literature
suggests that procedural justice can be more important than
distributive justice in affecting employee organisational
commitment and trust in management. For this study, we
focus on both distributive and procedural justice to assess
this.
Yet, fairness may also include things such as diversity, equal
employment opportunity and female representation in the
workforce, to name but a few. We examine a wider range of such
dimensions in the survey. Iverson and Zatzick (2007) came up with a bundle of 11 practices, in their survey of the
literature, that represent various dimensions of a fair workplace:
? Written policy on OHS;
? Written policy on EEO/Affirm Action (AA);
? Formal training;
? Written grievance procedure;
? Performance-related pay;
? Skills audit;
? Team-building;
? Formal selection;
? TQM;
? Quality circles; and
? Employee welfare schemes.
Clearly, formalisation of policy and practice is important and this coincides with assumptions within the IR field. In
some countries, a few of these practices are mandated under legislation and should thus be routine in
63
organisations. They nevertheless qualify for inclusion under the high-performance banner even though a number
of authors (Bryson et al 2005; Godard, 2001; 2004; Kauhanen, 2009) point out that organisational innovation is
the determining characteristic of the practices we should examine. Nevertheless, Iverson and Zatzick‘s list
remains useful. For example, it suggests that some elements open to legislative initiative – such as on OHS,
grievance procedures and EEO/AA – offer the prospect of generating high performing workplaces through
national-level state intervention rather than through awaiting sporadic firm-level activity. That is, societies can
make a choice to seek an economy based on high performing workplaces and take active steps in that direction.
A surprising finding in the research is that many fewer employers have adopted these practices than we might
expect given the sustained popularity of these ideas over several decades. Even among ?adopters?, most have
implemented very few practices and in apparently haphazard ways (Addison, 2005; Bryson, et al., 2005; Graetz et
al., 2002; Godard, 2004; Kauhanen, 2009). When researchers collect individual level data, one finding suggests
segmented employee access to HPWs. White collar employees – and particularly more highly ranked ones or
those doing more complex tasks – have greater access. Finnish data suggest that employees in larger
workplaces and those in foreign owned firms also have greater access. The same is true for those who use
information technology more for intra-organisational communication (Kauhanen, 2009)
It is not clear why there has been so little organisational take-up of the high performing workplace agenda in
Australia. Bray et al., (2005) suggest that it may be the result of management inertia and, in particular, lack of
sufficient strategic focus on HRM (see also Section 3 for a discussion of barriers to implementation). Union
distrust or institutional barriers are other potential explanations. However, as Bray et al. (2005) point out, AWIRS
1995 showed that the IR climate was propitious for the introduction of high performing workplace practices.
Indeed, workplace managers and union delegates interviewed were generally positive and the data suggested
that unions played little role in impeding workplace innovation. Instead the major constraints to innovation by
management were of a financial nature, and came from head office or from government.
There is broad agreement that the introduction of high performance-oriented practices improve organisational
outcomes, like productivity and innovation, through at least one of three avenues:
1. Raising the quantity of employee effort;
2. Increasing the quality of that effort; and
3. Improving work processes.
Greater task autonomy and variety and as well as employee discretion over their work, make for more interesting
work. This should increase motivation and commitment, and hence the quantity of effort. Agreeably collaborative
working arrangements – for example through autonomous teams and problem-solving groups – encourage
sharing of knowledge and improved quality of employee effort. Supportive HRM policies such as job security,
internal promotion and particular reward systems increase employee trust in management so that better work
processes result from improved communication in various directions within an organisation (Addison, 2005;
Bryson et al., 2005). More interesting work, agreeably collaborative working arrangements, supportive HRM
policies and a sense of fairness or organisational justice also encourage greater employee engagement.
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Moreover, there is also consensus, across academic fields, as to the importance of considering the
implementation processes for successful adoption of these practices and their sustainability. Put simply,
managerial adoption of elements of the high performing workplace agenda alone does not guarantee a high
performing workplace. The ways in which implementation takes place matter.
2.5.3. High Performing Workplaces: Can We Identify a Particularly IR Perspective?
There is no particular ?disciplinary? way in which IR researchers (or practitioners) would address ?high performing
workplaces? but there is a greater explicit propensity in IR to consider outcomes or priorities independent of
managerial agendas. Researchers in other fields mostly see management practices, such as information
provision, provision of interesting work, EEO, safe workplaces, work-life balance or greater job security, as means
to achieve organisational ends like enhanced employee satisfaction, commitment and engagement. It is possible
to convert achievement of these goals into quantitative benefits for employers, such as higher productivity or
innovation rates, lower turnover and recruitment costs etc.
For many IR scholars, however, those management practices should be ends in themselves – solely because
employees prefer them. In this, questions of employees‘ own rights and interests and of fairness are central
concerns. And this interest in fairness, from an IR perspective, goes beyond what employers by themselves may
be willing to concede. It centres on regulatory protections for procedural and distributive justice. Where then does
this leave employee-centred goals and management concerns for greater productivity? One influential IR
response is, in the words of Bray et al. (2005, p. 325), that, ?organisational justice and employee voice not only
help to build more cooperative relationships but they also help to build more productive ones as well.? Thus, the
centrality of access to unionism and collective bargaining relies on the fact that they embody two cardinal
elements in much IR research; fairness at work, and employee voice – also often referred to as ?justice?. Here,
justice includes both the distributive and the procedural element. Unions and collective bargaining provide voice
(procedural justice). There is also consistent international evidence that they improve distributive justice for
employees (fairness) in terms of better pay, working conditions and hours of work.
According to Graetz et al. (2002), it is therefore possible to group disciplinary approaches to high performing
workplaces into three categories:
(1) An HRM approach that prioritises investment in human capital in favour of maximum discretionary
effort from employees. In this sense it is ?high commitment?;
(2) An IR approach, which entails collaborating with unions so as to build high performing workplaces
through a mutual gains approach (see below). This involves exchanging productivity gains that come
from high commitment for job security, gain sharing and other benefits; and
(3) A quality management approach – with linked operational aspects. This accounts for the prevalence of
quality circles, problem-solving groups and the like.
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One could argue that the degree to which the IR researchers embrace the notion of high performing workplaces
reflects the degree to which they believe its practices are achievable while compatible with fairness – distributive
justice and voice. Indeed, at least one IR tradition is openly critical of the development of the HPWS idea itself,
considering it to be a trap through which employers weaken unionism and manipulate the trust and commitment of
employees increasingly exposed to unilateral managerial control (Kelly, 1998).
2.5.4. IR and High Performing Workplaces: What can we learn from recent historical experience?
Another very long tradition has looked favourably towards these ideas, contributing, for example, to the
development of formal works councils in northern and western Europe, particularly after World War II. Depending
on the country and the degree of legislative support that they enjoyed, works councils provide forums of
independent employee representation and voice into personnel and organisational decision-making areas that
elsewhere remain under complete managerial prerogative. In some countries, works councils are linked directly to
unions; in others, those links come through union activism in works council elections. In countries like Germany,
Austria, Holland and in Scandinavia, works councils are institutionalised in medium-to-larger firms and provide
avenues for both representative voice and the potential, through policy-innovation, to broaden direct participation
(Markey, 2002). European Union regulations also enshrine a (weaker) works council model for transnational firms
operating across Europe.
One of the flowerings of this larger tradition was the ?industrial democracy? movement of the 1970s and early
1980s. Its proponents advocated, researched and initiated initiatives for humanising work and democratising
workplaces, particularly where that work and those workplaces were narrowly routinised and repetitive, steeply
hierarchical, de-skilled and monotonous. In some countries, industrial democracy was a strategic priority of
unions. In others it came through government initiative or employer experimentation. Collective bargaining and
legislation provides much wider coverage and uptake for these initiatives. Employer initiatives, like that at Volvo in
Sweden, often create deeper and more diverse experimentation, if more short-lived. However, in those countries
with institutionalised support for works councils and other forms of participation, those in favour of more
comprehensive or fundamental change towards greater industrial democracy find it easier to gain traction for their
ideas.
Industrial democracy advocates proposed approaches to create what they considered would be high performing
workplaces. The more institutionally-oriented sought to combine greater union-employer cooperation in
institutional IR with union and collective employee participation in the workplace that could include involvement in
co-managing personnel policy and practice beyond the traditional boundaries of collective bargaining. Expected
outcomes were for employees (and unions) to have a greater say in the design of work and that the work itself
would be more varied and ?enriched?. Those doing it were to have greater autonomy and discretion, whether as
individuals or in teams. Current interest in high performing workplaces clearly reflects the continuing influence of
this tradition.
In Anglophone countries, researchers in this tradition have sought to develop forms of employee participation and
work enrichment in the absence of the sorts of support provided in works council countries. Those advocating
66
combining more cooperative (institutional) industrial relations with more participative workplace practices believed
this would develop greater trust between employers and unions, and employees and employers at work (Lansbury
& Davis, 1980; Kochan & Osterman, 1994).
The industrial democracy movement declined alongside a sharp decline in strike activity from the 1980s and, in
some places, also in union density. There has been much less energy in the Anglophone world in favour of co-
determination. Indeed, during Australia‘s Accord years (1983-96), the industrial democracy agenda merged with
one stressing high performing workplaces under the award restructuring from the late 1980s and then the Best
Practice Demonstration Program of the early 1990s (Gardner & Palmer, 1997; Rimmer et al., 1997). Employer
priorities for functional flexibility captured much of this policy agenda as it combined with union preferences for
multi-skilling and competency-based training qualifications tied to systematic career ladders. Unions moved to the
centre of national policy making alongside a Labor government but gained little influence for themselves or
employees over the nature of work. Job enlargement became more common but jobs were not necessarily
enriched. Employees received more responsibility but often at the expense of autonomy and discretion. The
Coalition government, from 1996 to 2007, was largely uninterested in fostering a high performing workplace
agenda. It believed in fostering particular labour market dynamics from within a legislative and policy regime that
sought to weaken unions and strengthen the hand of employers in relation to now more vulnerable individual
employees (Lee & Sheldon, 1997; Gardner, 2008). ?Workplace reform? and organisational delayering produced
more work intensification and little employee involvement (Watson, 2003).
2.5.5. High Performing Organisations and IR: What can we learn from recent international experience?
Industrial relations research, policy and practice in north and western Europe has continued to more consistently
embrace the sorts of intra-organisational phenomena that reflect the interests of earlier industrial democracy
advocates and contemporary HRM and OS researchers of high performing workplaces. Yet, the vast majority of
studies on this agenda have concerned themselves with Anglophone countries (Kaunanen, 2009). This is of
particular interest as authors, such as Godard (2001, 2004), who have suggested that Anglophone countries are
those least amenable to effective implementation of these high performance-oriented practices, precisely because
the existence of large non-union sectors allows employers to introduce those practices on their own terms and for
their own benefit alone. With no access to unions – and the fairness and voice (distributive and procedural
justice) that they can offer – employees have less trust in their employers.
During the 1990s, in Anglophone countries, there was a great deal of optimism about the benefits to employees
and their unions as well as employers through implementing the high performing agenda. The particular practices
or bundle of practices identified as necessary to create high performing workplaces met the core elements of the
IR perspective as to what contributed to better jobs, better work, better working lives and better employment.
One line of optimism saw opportunities for ?mutual gains? in the interaction of unions and management (Kochan &
Osterman, 1994). This stood in stark contrast to a pervasive picture of employers forcing US unions into
?concession bargaining? as the price for maintaining unionised plants. The idea developed theoretically from the
literature on integrative (or collaborative) bargaining. It relied on two crucial notions: that cooperation would allow
67
Bryson et al (2005) find that a
fundamental prerequisite for
employees’ trust is that they receive
early, full and accurate information
from management about the strategy
and operation of the organisation and,
most particularly, ahead of any mooted
changes that will affect them. The
question of management informing
employees is thus an important one
raised in this survey.
for increased productivity (the expanded pie); and that the parties would share those gains in some relatively fair
way. Both notions depended, in practice, on higher levels of trust between the parties than was mostly apparent in
US industrial relations. This is a problem-solving approach that builds positive negotiation relationships that
engender further trust, openness and a willingness to see the situation from the other party‘s point of view
(Lewicki et al., 2006). From within a (US) legal system that works against unionism, the hope was that employers
would learn that it was in their own interests to develop open and productive relationships with unions. In turn, and
voluntarily, this experiential learning would generate greater employer acceptance and legitimacy towards unions
and collective bargaining.
In the USA, the success of this scenario depended on it
delivering on employers‘ own material wants. It was not a
question of labour rights but of employers finding that
collaboration with unions augmented productivity, innovation
and employee engagement. Emerging research literature
explained how this might transpire. Bryson et al (2005)
summarise it, pointing out the three ways that union
representation can interact with and support the high
performing workplace agenda:
a. Bargaining:
Unions provide the potential to exert monopoly power over labour supply with the purpose of improving wages
and working conditions. While this can negatively affect organisational finances, it also has the potential to
attract and retain better employees and provide greater employee motivation;
b. (Collective) Voice:
Increasing employees‘ collective voice through unions can increase productivity by lowering exits (and related
costs). It can extend job tenures and allow for productivity improvements through additional training and
development. Further, a union as employee voice channel provides useful information and feedback to
management regarding improvements in product, process or other areas; and
c. Agency:
Unions can reduce transaction costs for employers given bounded rationality and information asymmetry by
providing help to employers in managing the workforce through formal and informal agreements.
The mutual gains approach achieved some important headline successes but its diffusion was limited. One major
problem remained the very limited union coverage across US workplaces. Given the historically ingrained anti-
unionism pervasive in employer circles, why would non-union employers seek out unions with which to
experiment with this learning? Another problem was that US capitalism was increasingly in thrall to financial
markets themselves focused on short-term financial results rather than longer-term organisational performance.
Stock markets and company boards applauded and rewarded senior executives for radical cost-cutting, layoffs
and shifting plants from union to non-union states (if not off-shore). Where unions still survived, concession
68
This survey measures firm practices
such as:
? Equal employment opportunities
? Flexible working arrangements
? Training
? Wage determination and its
regulatory basis
? Employee shared ownership
? Employee consultation
mechanisms
bargaining rewarded employers‘ competitive behaviour against their employees. If employers have made huge
gains over recent years, they have shared very little with their workforces.
These outcomes generate empirically-based pessimistic or sceptical views regarding the mutual gains agenda in
an environment so hostile to unions. Another more theoretically informed line of pessimism sees poor outcomes
for employees (and unions) from a more structural perspective. It views the whole agenda as a mechanism for
employers to increase work intensification (Ramsay et al., 2000). Despite not directly exploring the link between
high performance-related practices and work intensification, Green (2001) found substantial evidence of recent
work intensification and resulting job-related stress in the UK. As one of his suggestions is that self-managing
teams and team-based targets have contributed to this intensification, it seems plausible to assume that this has
some link to the agenda‘s implementation.
Indeed, as Guest et al. (2008, p. 125), point out for the IR literature, ?Trust lies at the heart of cooperative
industrial relations behaviour … and can be viewed as both an antecedent and a consequence of industrial
relations processes.? According to much of the literature (see Bryson et al., 2005) a fundamental prerequisite for
employees‘ trust is that they receive early, full and accurate information from management about the operation of
the organisation and, most particularly, ahead of any mooted changes that will affect them. The question of
management informing employees is thus an important measure within our surveys.
Another level is consultation mechanisms that legitimise frank feedback from employees. A higher level still is co-
determination through works councils and, as in the case of some industries in Germany, through employee
representatives on the supervisory boards of firms. To this end, Britain‘s New Labour Government has recently
instituted reforms providing for greater information and consultation rights for employees (Guest et al., 2008).
One can also make a strong argument that diffusion of many
crucial personnel-oriented practices appears easiest and most
successful where it has the support of legislation, government
policy or national level collective agreements. As Iverson and
Zatzick (2007) point out, the literature suggests that those
practices include job security, equal employment opportunity,
workplace health and safety, and support for training access.
Arguably, a more current reading would include work/family and
other flexible working arrangements that increase employees‘
intention to stay and commitment to the organisation. Trust is
highest where employees gain rather than lose through productivity improvements. A virtuous cycle is most likely
where job security, desired working hours and real wage levels are least vulnerable to unilateral employer
pressure. This appears crucial to employee perceptions of fairness and for their sense of voluntary engagement.
We therefore ask demographic questions within the HR Manager survey regarding:
? Equal employment opportunity;
? Flexible working time and work/family arrangements;
69
Research indicates that
union membership and
access to collective
bargaining are measures
through which employees
are given voice and
procedural justice. The
survey identifies the breadth
of such practices in the
Services sector.
? Training;
? Regulatory basis of wage determination (awards, national minimum wage, AWA, EBA, common law
contracts);
? Employee shared ownership; and
? Employee consultation mechanisms.
For Godard (2004), IR systems in Anglophone countries allow employers too much discretion to take advantage
of their introduction of high performance-related practices in the absence of legislative or union protections of
employees. The result, as Osterman‘s (1999, 2000) longitudinal work shows, is that US employers are able to
sustain their own high performance priorities despite not sharing productivity gains with employees through pay
increases. At the same time, they exploit the relative powerlessness of non-union workforces or unionised
workforces under stress by stripping away job security through large levels of layoffs and outsourcing. The
message here is that employers, unconstrained by regulation, do not need employee trust to implement and
maintain this version of high performance. Fear can be enough. Cases like these do not meet our definition for
high performing workplaces as they come at the expense of fairness, employee well-being and voluntary
engagement.
Interestingly, Iverson and Zatzick‘s (2007) research, based on Australia‘s AWIRS 1995 national survey, found that
while the introduction of high performance-related practices positively correlated with harsh (??) downsizing, it
also correlated with less harsh forms of downsizing. In firms with those practices, employers chose to use forced
redundancies less and natural attrition and voluntary redundancies more. For those authors, this suggests a
choice to maintain employee commitment in the face of organisational or
market pressures to cut staff. Iverson and Zatzick see this as consistent
with Social Exchange Theory, particularly in its psychological contract
manifestation. They conclude (p. 472) that such workplaces, ?do
downsize, but they do it in a way that attempts to ensure procedural
justice and fairness in the process, as well as maintain employee morale
and effort.? This in turn brought higher productivity. Overall then, this
meets our definition of a high performing workplace.
Another indicator of how different institutional environments affect
strategic choices on both sides relates to performance-based pay. Iverson
and Zatzick (2007) found that, in relation to AWIRS 1995, performance-related pay was not significant. Yet, in US
studies, it is mostly a very significant factor. However, in the US context, unlike in Australia, statutory minimum
wages have long been at rising levels and the vast majority of employees are untouched by the outcomes of
union collective bargaining for rates above those minimal. This allows US employers much more discretion as to
the amounts of performance-related payment they can offer without affecting total pay.
Perhaps the UK currently holds an intermediate position between the USA and Australia in these matters. Bryson
et al., (2005) developed the first UK study that systematically tests the effects of unionisation and the adoption of
relevant practices against organisational productivity and financial outcomes. They used a four-quadrant model
that combines union and non-union firms, and ?high-involvement management? (similar to our high performing
70
workplace) and ?traditional workplaces? (ibid, p. 485). Most of their unionised/ high-involvement workplaces were
in the finance sector (60 per cent). The largest number of unionised/traditional workplaces (4 per cent) was in
manufacturing. They found (ibid, p. 485) that the adoption of those practices ?has a positive impact on labour
productivity.? Interestingly, they also found that ?this effect is restricted to unionised workplaces?. High
performance-related practices in the non-union sector had no apparent impact on productivity.
These findings reinforced slightly earlier findings from the UK. Metcalf (2003) had found that non-union
workplaces with more such practices outperform on productivity than unionised workplaces with fewer high
performance-related practices. However, he found that the highest labour productivity came where there is both
unionisation and those practices. Guest and Peccei (2001) found somewhat similar results.
In the union sector, Bryson et al (2005) found that employers shared productivity gains from high performance-
related practices with employees through higher wages without financial detriment to the firm. That is, they jointly
expanded the pie (real mutual gains) and the employees – via their unions – and gained a larger share from that
expansion. For the authors, this suggested that these types of unionise high performing workplaces operate in
high-value added product markets and thus have capacity to pass on higher wage costs (p. 483). Interestingly,
this contrasts with Osterman‘s (1999) findings regarding US employers monopolising the gains from high
performance-related practices. Perhaps there is greater diversity between these two most liberal market
economies than some authors might admit.
Further, Bryson et al. (2005, p. 467) suggest that unions can affect ?whether or not an employer introduces [those
practices] and, if so, which … practices, as well as influencing the operation of those practices after introduction.
… In effect, union bargaining can either lower or raise the costs of … introduction [of such practices].?
Nevertheless, they argue, against the pessimists, that claim the British evidence of increasing use of high
performance-related practices has not come at the expense of unionisation. This again suggests that the
interaction of IR and the high performing workplace agenda in other Anglophone liberal market economies, like
Australia, may be much less negative for employees and their unions than the US-based research suggests. This
is particularly the case for Australia despite legislation that remains strongly discouraging towards union activism
(Fenwick & Howe, 2009; Sheldon, 2008). Instead, the existence of national minimum employment standards
augmented by (modern) awards under the Fair Work Act, 2009, removes some of the options from those
employers who would wish to monopolise gains from implementing high performance-related practices (Murray &
Owens, 2009).
This picture is even clearer if we turn our attention to those European ?social market economies? with very high
levels of union density, such as in Finland and Scandinavia. Unlike the US, Britain and Australia, most European
countries do not have institutionalised non-union sectors. Rather, even in poorly unionised countries like France
or Spain, most employees (and workplaces), despite not being unionised, still come under agreements settled by
industry or even national-level collective bargaining. This removes advantages for employers to shift from
enterprise bargaining in the union sector to no bargaining in the non-union sector. In northern-western Europe,
this is even less of an option (Bamber & Sheldon, 2007).
71
Kalmi and Kauhanen (2008) used Finnish national survey data from 2003 to test arguments from Godard (2004)
that the introduction of workplace innovations in social (or coordinated) market economies would show a more
positive picture for employees. In examining the Finnish data, their expectation was that it would display support
for the optimistic high performance approaches emanating from the Anglophone world. That is, they expected to
find implementation through employee involvement and mutual gains outcomes rather than work intensification
and employer exploitation of high performance-related practices.
For Kalmi and Kauhanen (2008), Finland has a number of comparative advantages that should make for much
more successful engagement with the high performing workplace agenda. Culturally, Finland is a highly
collectivist and high trust society, facilitating for example, implementation of self-managed teams. More generally,
it brings very low levels of employee resistance to the introduction of innovative practices. These deeply held
societal values have also produced a public policy agenda that emphasises quality of working life – via engaged
social partnership – alongside productivity improvement. Furthermore, the legal environment supports direct
employee participation in the design of workplace innovations raising the likelihood that those innovations will
meet employee needs and wants. As well, employment law in Finland prevents dismissals ?without just cause?
(ibid, p. 439), generating high levels of employee job security and removing another area of potential trust breach
by employers.
Finland‘s institutional IR system is based on its stakeholder model of corporate governance. Some 80 per cent of
employees are union members, an apt contrast to the USA or Britain. Centralised collective bargaining (at
national and sectoral levels) produces very wide coverage of collective agreements. As this bargaining is the main
means of adjusting pay, any employer choices to provide discretionary performance-related pay would sit on top
of already high collectively bargained rates. This means that they are more likely to represent genuine sharing of
jointly-generated productivity improvements rather than an internal re-arranging of fixed remuneration budgets.
Moreover, the scope (content areas) of this bargaining increasingly includes questions of work re-organisation, so
that collective bargaining sets ?a mutually agreed framework for the introduction of workplace innovations? (ibid, p.
438). Overall then, the structural context for adoption of high performance-related practices in Finland includes
strong support for collaboration, openness and trust-building between employer and employees, as well as
collective employee voice, bargaining and agency.
Finnish co-determination legislation provides further institutional inducements for trust-building, openness and
collaborative problem-solving. The law makes it mandatory for employers to provide employees with the firm‘s
financial data and to consult with their workforces regarding any major changes in duties, work methods or work
organisation. Crucially, this consultation needs to occur in the planning stages. As well, the law empowers
employees to participate in the implementation of new practices. Overall then, it is clear that the Finnish IR system
– and Finnish society more generally – is highly favourable to the development of the employee trust and voice
over employment and work. Moreover, it would seem to provide particularly strong opportunities for employee
discretion and autonomy over their work and for employers to adopt high performance-related practices.
Kalmi and Kauhanen‘s (2008) results strongly confirm the mutual gains approach for employees in high
performing workplaces. As they put it (p.449); ?The presence of workplace innovations appears to be associated
72
with higher job influence, higher wages, and higher job satisfaction … however, with the exception of information
sharing, all [workplace innovations] were related with high job intensity.? Moreover they found evidence that when
it came to introducing such practices, more is better. Indeed (ibid, p. 453):
The adoption of several innovations is associated with increased job influence, increased job
security, higher wage, lower stress, and higher job satisfaction than in the case where only one or
two practices are adopted. These effects are often fairly sizable and generally larger than the effects
of any individual practices.
Once again, however, partial adoption of high performance-related practices is still better for employees than
working where there are none. Even having only one or two practices in operation increases employee job
influence, job security, wages, and job satisfaction. Among the most positive outcomes are that information
sharing ?has consistently positive implications for employees? (ibid, p. 454), self-managed teams produce mostly
positive outcomes and so too does employer provision of training. Overall, employees working in ?innovative
workplaces? do much better than those in workplaces that only partially adopt such practices. Employees working
in ?traditional? workplaces fare worst. For Kalmi and Kauhanen (2008), this confirms (for Finland) Godard‘s (2004)
hypotheses regarding the advantages of implementing workplace innovations in social or coordinated market
economies.
The sorts of comparative cultural, legal and institutional advantages that Finland‘s employees enjoy mean that the
achievement of high performing workplaces comes about in the most employee-friendly ways. Substantive and
procedural justice, trust, collective voice and the quality of employees‘ working lives are both a means and an end
of reform. Moreover, for those authors, these sorts of highly positive outcomes are available through public policy
choice and action. Indeed, they argue that (ibid, p. 455):
One implication of our results is that government-promoted workplace development programs that
address both employer and employee interests in workplace change [as in Finland] … may have a
significant potential in supporting positive outcomes for both parties.
Our Australian study addresses these insights from the work of Bryson et al. (2005) and Kalmi and Kauhanen
(2008). The focus is on the achievement of high performing workplaces in the most employee-friendly way.
2.6. Training
2.6.1. Introduction
Alongside competition, innovation, investment and enterprise, skills are seen as playing a crucial role in
stimulating productivity growth (Richardson, 2007; Society for Knowledge Economics, 2009). In Australia,
numerous studies encourage increased investment in workplace training to improve the nation‘s international
competitiveness, long-term economic performance and address the ?skills gap? (Richardson, 2007; O‘Hanlon-
Rose, 2008; 2009; Green, 2009).
73
The research on training and firm
performance is inconclusive with some
studies casting doubt on the hypothesis
that an increase in training has
anything to do with increases in firm
performance, whilst others find that
training is a powerful predictor of firm
productivity and profitability.
One possible explanation is that high
performance HRM practices are
interdependent processes that should
not be considered independently but
as subsystems or bundles.
It is likely that training only impacts
organisational outcomes in association
with other management practices
rather than in an isolated way.
A number of scholars argue that the success of an organisation depends on the skills and actions of its people
and the way employees are trained and developed. There is a large HRM literature that considers training as a
bundle of high performance practices, with training a dominating element within HRM bundles (see the HRM
section, 2.3). Despite all this, there is only a relatively small body of work that examines the direct impact of work-
related training on measures of productivity, innovation, fairness and employee engagement. In addition, much of
the debate around the ?skills crisis? has taken it for granted that the education and training system simply needs to
produce more skilled workers. There has been little attention given to whether the existing skills of the workforce
are fully utilised or effectively deployed.
The following section reviews this literature. Specifically we ask:
? Do high performing workplaces train their employees more often?
? What type of skills training contributes to high performing workplaces?
? Are the skills of the workforce fully utilised and effectively deployed?
? What occupational groups receive training (coverage) and how much time is devoted to training for each
worker (intensity)? We look for trends and uncover relationships to high performing workplaces.
2.6.2. The Effects of Training on Organisational Outcomes
In a theoretical review of the literature, Frazis and Lowenstein (2005) cite numerous studies which estimate the
effects of training on productivity to be high. Research in Portugal (Almeida & Carneiro, 2008), across Europe
(Pischke, 2005), Germany (Bassanini, Booth, De Paola & Leuven, 2005), France and Sweden (Ballot, Fakhfakh &
Taymaz, 2001), France (Delame & Kramarz, 1997) and Italy (Conti, 2005) all suggests that training makes
significant contributions to firm productivity.
Almeida and Carnerio (2008) provide detailed information on the effects of training, accounting for the direct costs
of educational programs, and found that productivity returns to be substantial at 8.6 per cent. In a study of British
industries, Dearden, Reed and Van Reenen (2006) report evidence
that an increase of one percentage in the proportion of
employees trained is associated with a 0.6 percentage increase
in productivity and a 0.3 percentage increase in wages,
suggesting that the effects of training on productivity are larger
than the effects of training on wages. Dearden et al. (2006) also
strongly argue that the methodologies in the existing literature
underestimate the importance and value of training.
The studies cited above are based on the premise that firms
enjoy a higher level of labour productivity because employees
are able to work more efficiently and effectively because of an
enhanced skill set. Productivity benefits for the firm are passed
74
on to employees through higher wages. Thus, many of these studies track the wages of workers who have
received training and deduce that these higher wages reflect the productivity dividend that the firm gains from
investment in training. This approach however, has some problems in that there are many other factors, which
may affect the wages of workers other than training (Smith, 2001). Some studies have attempted to establish a
more direct link by isolating the effect of training.
Lynch and Black (2001) found no significant association between training and productivity when they controlled
for the effects of other variables. Felstead, Green and Mayhew (1997) cast doubt on the hypothesis that high
performing workplaces have anything to do with an increase in training. They found that the main determinants of
training were factors external to the firm, such as new regulations, quality assurance standards, occupational
health and safety and the requirements of professional bodies. Ashton, Felstead and Storey (1995) conclude from
their research in Britain that high performing workplaces developed through training have only been proven in the
United States.
More encouraging results have been found in studies of HRM ?bundles? (see section 2.3). Boxall and Macky‘s
(2009) research indicates that HRM practices (with training a dominating aspect of a company‘s HRM activities)
are a powerful predictor of improvements in firm productivity and profitability. Other studies also report that
bundles of practices have more influence on organisational outcomes than individual practices, like training
working in isolation (Shih, Chiang & Hsu, 2006; Lengnick-Hall, Lengnick-Hall, Andrade & Drake, 2009; Sung &
Ashton, 2004). An underlying theme in this research is that firms should create a high degree of internal
consistency, or fit, among their HRM activities. In a review of HRM developments, Lengnick-Hall et al., (2009)
conclude that high performance HRM practices are interdependent processes that should not be considered
independently but as subsystems or bundles. The rationale for this argument is that all HRM practices impact one
another in some way. This point is best illustrated with an example. Consider an organisation that seeks to
compete via an innovation business strategy. HRM practices (including training) need to be integrated to create
an innovative culture. This may include an HRM information system that captures employee ideas and
suggestions and changes to work arrangements such as implementation of cross functional teams to promote
collaboration and information sharing. Performance pay schemes which often reward employees for doing their
existing job well should be expanded to rewarding employees for thinking of improvements beyond the confines of
their present job and a team collaboration component. Furthermore, the implementation of an innovative culture
often means equipping employees with new skills, such as divergent thinking techniques or problem solving skills.
This in turn impacts on recruitment and selection practices which ought to focus on hiring employees with specific
skills. In this example, training positively affects organisational outcomes in association with other HRM practices
rather than in an isolated way.
Studies on the effects of training investments in Australia are rare, however several scholars provide valuable
insights. Maglen, Hopkins and Burke (2001) studied 30 Australian firms in the retail, manufacturing and hospitality
sectors using firm-level data to make some estimates of returns on training investments and the relationship of
training to other factors in the company such as business strategy and human resource policies. They found that
75
in many cases, although not all, training investments led to positive returns for firms, but a critical finding was the
relationship of training to other human resource policies. Testing the notion of the ?bundling? of human resource
practices to achieve greater effects for firms, Maglen et al. (2000) show that training is a critical element in these
bundles and that the returns to training cannot be fully realised unless training supports other initiatives in firms,
such as technological change.
Through a review of over 100 papers on the business practices of thousands of enterprises, Ernst and Young
(1995) found that the economic benefits to companies were greatest when management practices such as
performance development and evaluation were integrated with employee training programs, again suggesting the
value of HRM bundles.
Blandy et al., (2000) studied 41 firms across two industries (hotels and kitchen furniture manufacturers) evenly
distributed across Melbourne, Adelaide, Perth and Darwin to investigate differences in the quantity and quality of
training as well as the effects on firm profitability and productivity. The experiences revealed by the case studies
show that firm returns from training can be exceptionally high, especially for training that is highly specific, rapidly
accomplished, and related to the introduction of new technology or working patterns (Blandy et al., 2000). The
authors describe the case of a company that changed its work culture in a particular department through an
intensive training activity involving all of the staff in the department over a series of weekends. The result was a
25 per cent increase in productivity and a rate of return to the company on its investment in training again in
excess of 500 per cent per annum. The results suggest that the benefits were not limited to particular individuals
who received training but extended to all incoming employees as well (who automatically become inducted into
the new culture rather than the old). As a result, the productivity effects of training to change the work culture are
independent of labour turnover and, hence, are likely to be more profitable than other forms of training whose
effects are cut short if the particular workers who have received training quit (Blandy et al.,2000).
The main findings of Blandy et al.‘s (2000) study include:
? Hours (quantity) of training provided by Australian firms are directly related to:
o Product–market uncertainty and unpredictability. The greater uncertainty, the more training that
was provided;
o Other forms of capital investment (in innovation, physical capital and research and development).
As capital investment increases, so does training expenditure; and
o Involuntary turnover. Firms with lower turnover invested more heavily in training.
? Types (quality) of training given by Australian firms are directly related to:
o The presence of internal labour markets in firms; (an example??)
o Other forms of capital investment by firms (in innovation, physical capital and research and
development);
o Competitive product–market conditions. (an example??)
76
Firms in the services sector earn their
living by exchanging knowledge and
offering problem solving capabilities
to clients.
One of the most important skills for
employees in this sector concerns
interactions with people, including
communicating, resolving customer
problems and working in a team
environment. The survey asks about
the type of training employees
receive, including:
? Communication skills
? Interpersonal skills
? Team building skills
? How to manage people
? Leadership development
? Technical training
? Compliance training e.g. OH&S
? Negotiation skills
? Mentoring
? The profitability of firms is directly related to:
o The quantity and quality of training provided by them;
o Firms paying above market wage rates; and
o Firms‘ difficulties in finding suitable employees.
In the last decade, the literature has moved away from stressing the links between training and higher labour
productivity in terms of wages. It now stresses the importance of training in preparing the workforce to become
more flexible and adaptable, thereby enabling firms to successfully innovate and introduce change.
2.6.3. Generic or “soft skills” versus technical or “hard” skills
As noted above, there is a large body of work that demonstrates a positive effect of training in a range of
industries across multiple countries. However, research on the type of training or skills that create positive
outcomes has mainly been carried out in manufacturing settings or in the United States (Whitfield, 2000; Barton &
Delbridge, 2001; Green, 2009). Studies in manufacturing have found that organisations which are more
productive and innovative have increased the responsibilities of front-line employees and their supervisors by
encouraging participation of employees through delegation of managerial decisions to lower levels (Whitfield,
2000; Barton & Delbridge, 2001). Florida et al., (1998) also found that innovation was fostered in automobile
factories through the promotion of knowledge and organisational learning. Such change created a new work
environment for lower level employees and enforced change to managerial functions (Whitfield, 2000). This
occurred through three dimensions: teamwork, employee involvement, and training (Barton & Delbridge, 2001).
In a review of manufacturing companies in 1992, Snell and Dean reported a trend toward up-skilling factory
employees into knowledge workers who can operate in cross-
functional, problem-solving teams. This trend results in higher
levels of innovation and productivity. Barton and Delbridge (2001)
conclude that to participate effectively in problem solving and
continuous improvement activities, shop floor manufacturing
employees need technical, analytical and planning skills as well as
interpersonal capabilities like communication skills, problem
solving abilities and leadership skills.
Osterman‘s (1994) manufacturing study suggested that training
plays a fundamental role in equipping employees with the skills to
identify and resolve problems, to initiate changes in work methods,
take responsibility for quality, and cultivate high levels of
commitment and job satisfaction. In addition, because employees
and supervisors operate with greater autonomy and influence, high
trust cultures are cultivated. Osterman (1994) found that high
77
performance workplaces required more skills for technical/professional employees and skilled, blue-collar
employees. There was also a distinct difference in the type of skills required. Whilst technical and professional
employees were selected on the basis of their professional competence, blue-collar employees were selected on
the basis of generic or soft skills such as interpersonal attributes and the ability to take on responsibility
(Osterman 1994).
In an Australian study commission by the Department of Innovation, Industry, Science and Research to identify
the determinants of high performance and to benchmark Australian firms against the best globally, Green et al
(2009) found that higher skill levels both at managerial and workforce levels are positively and significantly
associated with the ability to develop and deploy superior management practices. Indeed, Green et al. makes a
persuasive argument that upgrading the skills of managers and shopfloor workers through training and
development initiatives enhances performance within manufacturing firms. Like the other manufacturing studies
reviewed above, Green et al. suggests that increased autonomy at the operational level also enhances
management performance. This is achieved by introducing more flexible management styles, decentralising
decision-making processes and fostering self-managing work environments. This requires the development of
generic skills like people management, teamwork and problem solving in both managers and shop floor workers.
Beyond manufacturing, a number of scholars emphasise the importance of developing both technical expertise
and generic, soft skills to build a high performing workplace. For example, Pfeffer and Veiga (1999) suggest that
cross functional work teams are essential for innovation and superior quality irrespective of the industry. Working
in a team setting requires advanced communication skills and a greater awareness of tasks performed by other
members of the team. These are best developed via training and development (Pfeffer & Veiga, 1999).
Academic research in the service industries regarding the type of training that impacts productivity and innovation
is limited. The service industries are at the frontline of Australia‘s economy and are heavily influenced by continual
changes in customer demand and expectations, an increasingly global market place and rapid technological
change that demands ongoing training. The service sectors also face ongoing demands from customers to
increase integration of product and service offerings (Salonen, 2004). Hence company flexibility and innovation
are a priority for business survival and growth. The labour intensive nature of the service industries means that
the quality of employees‘ skills is a key determinant of industry productivity (Service Skills Australia, 2009). The
question remains though, what skills are needed in the service sectors?
The service industry environmental scan (Service Skills Australia, 2009) draws together intelligence and research
on the services sector. The report highlights existing and emerging trends in the service industry and how these
impact on skills and labour needs. Entry level skills are differentiated from higher level skills for those employed in
the service industries (Service Skills Australia, 2009:18).
Entry level skills
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Employees are the most important asset for a business within the service industries since success largely
depends on the quality of the customer service employees provide. As most employees are in operational jobs,
higher level skills and qualifications are typically low. According to Service Skills Australia (2009) the most
important skills concern interactions with people, for example customer service, communicating and resolving
customer problems and working in a team environment. In addition, technical skills associated with the job are
also crucial (like processing financial transactions).
Higher level skills
A key priority in service sectors is the recruitment and development of leaders and managers who will work
closely with their staff to maximise employees‘ career opportunities, improve engagement levels and reduce staff
turnover. Supervisors and managers need to be equipped with leadership skills to improve motivation, build
teams, and communicate effectively. There is also a continuing need for specialised service sector skills such as
innovations in service delivery, service recovery and strategic planning.
How are skills best developed?
Most of the studies cited above measure training effects by examining formal off-the-job training because of
difficulties associated with studying the quantity and quality of on-the-job training. During on-the-job training
however, workers pick up skills whilst operating alongside more experienced employees. This may be particularly
useful in the service sectors, especially for front-line or entry level staff (Maglen et al., 2001). Effective on-the-job
training requires structuring the workplace so that experienced employees can give support and coach less
experienced staff. A worker may simply ?shadow? or observe fellow employees to begin with and are often given
instruction manuals or interactive training programs to support the learning process.
A number of advantages of on-the-job training have been reported. In her 1995 study, Bartel examined the
personnel records of a USA manufacturing company to estimate the impact of on-the-job training on the
performance ratings of employees. Since all employees underwent an annual performance appraisal/rating
exercise, it was possible to measure the impact of on-the-job training on the performance of individual employees.
The results show that individual workers who received on-the-job training were significantly more likely to receive
increases in their performance ratings in the following year, suggesting a positive effect on job performance. From
the same data, Bartel (1995) calculated that the rate of return to the firm from on-the-job training was in the order
of 35 per cent.
In Maglen et al.‘s (2001) Australian study of retail, manufacturing and hospitality sectors, the majority of
respondents indicated that, ?having the work explained by another person doing the job? and ?being shown by
another person? had contributed to their learning the job, well in excess of numbers who thought formal training
had contributed. Maglen et al. (2001) conclude that the tacit knowledge shared in these one-to-one interactions is
more difficult to develop in formal training.
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Skills utilisation concerns the extent
to which employees fully utilises their
skills and abilities at work.
Research show that employee skills
are underutilised in Australian firms
(Watson, 2008). Maximising the
utilisation of employee skills is crucial
for workplace productivity and may
well be the biggest ‘skills crisis’
Australia currently faces.
The UK Skills Survey 2006 found that
being able to make use of abilities at
work was ranked higher than good
pay by employees. We use Felstead et
al’s (2007) questions from this survey
to ask employees about the
‘opportunities for using their skill and
abilities at work’ and also the
‘opportunities to use initiative’. We
then assess the impacts on
productivity.
Skills may also be developed through the broadening of employees‘ technical skills or increasing the variety of
tasks through job enlargement, which numerous scholars have argued is critical for organisational productivity
and flexibility (Smith, 1997; Eitzen, Panton & Mills, 2004; Cordery, 1989). As an example, a sales assistant job
may be enlarged through multi-skilling to include stock control, new worker training and weekly reporting tasks.
This is likely to enhance productivity since fewer workers are required to perform the same range of tasks.
Flexible task assignment then increases skill utilisation and ensures that employees have less idle time and are
able to assume other tasks to cover absenteeism (Hackman & Oldham, 1980). The degree of overlap of skills and
the high skill levels also makes it possible for a work team to be more flexible in meeting fluctuating market
demand through peak/trough management often seen in service sectors. For employees, jobs are more varied
resulting in increased levels of satisfaction (Hackman & Oldham, 1980; Campion, Cheraskin & Stevens, 1994).
Denton (1992) cites the example of Lechmere Inc., a 27-store retail chain in the United States, who found that
multi-skilling enhanced employee performance and relations. Pay raises were put in place on the basis of the
number of jobs employees learned. Cashiers were encouraged to sell products and sporting goods staff received
training in how to operate forklifts. As a result of multi-skilling training, Lechmere Inc. was able to adjust staffing
needs by rerouting employees, thereby creating a more stable and productive workforce. Pay incentives, along
with the prospect of a more varied and interesting workday, proved to be valuable elements of Lechmere's staff
recruiting.
Despite evidence of numerous positive outcomes for organisations and employees, a few researchers have also
found that many firms underestimate the high costs associated with multi-skilling (for review see Friedrich, Kabst,
Weber & Rodehuth, 1998). Apart from the monetary expenses, in the start-up phase of multi-skilling, the
deployment of team members who are only beginning to learn new skills normally leads to deficits in the team‘s
performance (Griffin, 1991). In helping to resolve the contrary evidence in the literature, Campion and McClelland
(1993) conducted a job enlargement intervention experiment and
report that task enlargement had mostly negative outcomes
including less satisfaction, efficiency, and customer service,
more mental overload and errors. However knowledge
enlargement produced enhanced job satisfaction and customer
service, and less overload and errors.
2.6.4. Skills Utilisation
As reported above, there is a body of research which provides
strong evidence for the development of generic soft skills and
technical specialised skills, however there has been little
research which investigates the relationship between skills
utilisation and productivity. In this report, we argue that training
does not necessarily mean increased skills. While we do not
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dismiss the value of greater skills acquisition as an input to productivity and innovation, we recognise that
development of appropriate skills and utilisation or deployment of these skills is vital for productivity
enhancements.
The concept of skills utilisation is receiving increasing policy attention. However, most of the academic literature
focuses on skills acquisition rather than the narrower field, skills utilisation in the workplace. As a result, evidence
on the impact of specific skill interventions is limited. In this study we employ the following definition of skills
utilisation adapted from the Scottish Government (2008, p. 2),
Skills utilisation is about ensuring the most effective application of skills in the workplace to maximise
performance. Effective skills utilisation seeks to match the use of skills to business demands / needs.
For the purpose of this report, we suggest that skills utilisation is not merely about ensuring the most effective
application of skills in the workplace. Importantly, it is about giving employees at all levels of organisational
hierarchies the opportunity to use their full range of skills and abilities at work.
The UK Commission for Employment of Skills (2010) similarly explain that skills utilisation is concerned with
maximising the contribution that people can make in the work place, and therefore how well people‘s abilities have
been deployed, harnessed and developed to optimise organisational performance.
In an examination of the extent of a ?skills crisis? in the Australian labour market, Watson (2008) concluded that
the current skills shortage is not large enough to warrant the term ?crisis?. Watson (2008) found that 37 per cent of
employers reported that employees possessed skills beyond what is needed in their jobs and only 5 per cent of
employers have workforces with skill levels below those required. In property and business services, Watson
(2008) found that 25.5 per cent of employees reported underutilisation of skills. Watson (2008) also reported that
between 10 and 20 per cent of employees were working in jobs where their skills were not utilised, while about 14
per cent lacked the opportunity to enhance their skills through work. These figures are much higher among lower
skilled occupations, in low-wage service industries and for the contingent workforce; in fact, Watson (2008) found
an almost linear relationship between occupational level and skills utilisation. As a result of his study, Watson
(2008) claimed that Australia has an over-skilled workforce.
Linsley (2005) found similar evidence suggesting that 30 per cent of Australian workers are overeducated and are
underutilising their skills. Linsley‘s results also showed that about 21 per cent of workers with a degree were
working in jobs which did not require that level of education, while about 46 per cent of workers with a vocational
qualification were in jobs not requiring that level of skill.
If Watson (2008) and Linsley (2005) are correct, then increased training in the service industry is not critical to
raising productivity. Instead organisations need to find ways to effectively utilise skills. Sung and Ashton (2004)
81
describe skill utilisation programs as a complete shift in the way a company approaches skill development. Rather
than simply up-skilling the workforce or simply trying to increase the number of people gaining qualifications, firms
need to link skills to business needs before real improvements to organisational outcomes, such as productivity,
will be achieved. One method for doing this is competency mapping.
Competency mapping involves identifying key attributes and skills for each position and process within a
company. The competency map then plays a role in recruiting, selecting and retaining the right employees
because competencies guide the construction of accurate job profiles. Job profiles make the whole recruitment
process easier since candidates who apply for jobs understand what the position demands and interviewers know
what to look for in applicants. This increases the chance of retention as expectations of the new employee and of
the employer match. As the skills and qualities of each position in an organisation are clearly defined, employees
who aspire to higher levels see a pathway for further skill development, often achieved via training, which is
aligned with the needs of their employer.
Other ways to ensure maximum skills utilisation and enable all employees to fully use their skills and abilities is to
evaluate and explore in more detail the leadership styles and management control systems that allow and enable
this to happen. The Scottish Government‘s (2008, p. 6) literature review on skills utilisation explains that
?leadership and management are the factors that will have the greatest impact on skills utilisation. Three levels of
management will affect skills utilisation: people management, management of the learning acquired and
management of the organisation?.
2.6.5. Access to Training
A related issue in the literature concerns access to training between employees in differing occupational groups.
Analysing data collected in the 1995 United States Survey of Employer-Provided Training, Frazis et al., (1997)
found that training hours allocated to young workers was low but steadily increased with age, before dropping off
significantly for employees 55 years of age and older. In understanding which occupational groups received more
training, Frazis et al. (1997) further stratified groups by education level and wage, and determined that employees
with a bachelor‘s degree or higher were more likely to receive increased training than were their less educated
counterparts. In terms of wage or salary, those in the bottom remuneration quartile received an average of 4
hours of formal training per year, as opposed to 23 hours for those in the top quartile.
In the United States the amount of formal training varies considerably across industries. In general, organisations
in the transportation, communications, finance, insurance, real estate and mining industries provide more hours of
formal training than the average, and firms in retail trade and wholesale trade provide fewer hours than the
average (Frazis et al. 1997). However, the regulatory nature of many occupations in these industries (especially
transport, finance, insurance and mining) could explain this result and was not accounted for in the analysis.
Other evidence from the United Kingdom and the United States showed a strong positive association between the
skill level of workers and their access to training (Gallie, 1991; Brown, 1989; Lynch, 1992; Lynch & Black, 1997).
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These studies have found that already highly skilled employees increase their skills advantage viz-à-viz the less
skilled and that this has produced a polarization in the skill distribution between management level staff and
employees.
In Watson‘s (2008) study, about 41 per cent of employees undertook work-related training or education in the
twelve months prior to being surveyed. The largest categories of staff undertaking training were professionals and
associate professionals; the lowest proportions were labourers and elementary clerical, sales and service
workers. Watson (2008) provides evidence that business and property services have particularly poor results in
regard to frequency of training as compared to other sectors.
The Australian Bureau of Statistics (ABS) 1997 survey of education and training found that, in Australia,
employees on average receive 16.5 hours of employer-supported formal training in a year — a value that
translates into about an additional year of schooling during an employee‘s working life, and much more for some
workers. The ABS survey of training expenditure found that firms spent 2.5 per cent of their total wages and
salary bill on the training and education of their employees—a total of $1179m, which is a little over 0.8 per cent
of GDP or 15 per cent of total expenditure on education (see Long & Lamb 2001). Smith (2001) estimates the
hours spent by co-workers providing new workers with informal training to be approximately 62 hours per year.
2.6.6. Concluding Summary
In the current economic environment, training is often regarded as a frill or something that needs to be cut to
reduce costs (Karami et al,, 2004). This research project aims to contribute to our knowledge and practice in three
main respects. First, we attempt to ascertain whether there is a positive correlation between training and high
performing Australian workplaces (measured by productivity, innovation, fairness and employee engagement).
We test this effect by isolating training from other HRM practices and then by bundling training with other HRM
practices. Second, we investigate whether this relationship is moderated by effective utilisation of skills. Third, we
report groups who receive training (coverage), the time devoted to training for each worker (intensity) and the type
of training undertaken (category) to detect any trends and uncover relationships to high performing workplaces.
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A challenge commonly pointed out by
research is the constraints that
management accounting controls can
impose on organisations.
An example is when a strong focus on
conformity to plans and targets
prevents innovation and longevity
(Davila, 2005). Management
accounting controls, if inappropriately
designed or used, can also have
negative implications for staff
involvement in decision making and
the well-being of people at work
(Malina & Selto, 2001).
Furthermore, a fixation on myopic,
short term financial targets can
compromise investments into a firm’s
intellectual capital base, limit its long
term health and create ‘anorexic’
organisations.
2.7. Accountability and Management Accounting Controls
2.7.1. Introduction
Accounting control systems (such as budgets, target, procedures, manuals and plans) play a significant role in
creating high performing workplaces. Accounting controls are often seen to be the ?DNA of an organisation?. They
create visibility and transparency (and sometimes scrutiny), which enable management intervention (Mouritsen et
al., 2001). In other words, what gets measured gets managed
(Ridgway, 1956).
Management accounting controls are defined as ?formal,
information-based routines and procedures managers use to
maintain or alter patterns in organisational activities? (Simons,
1995, p. 5). They are ?socially constructed artefacts (people
design them) that create a very real social context for those upon
whom they are imposed that can fundamentally affect
behaviours? (Berry et al., 2009, p. 15). They are put into place to
achieve organisational objectives (Ansari & Bell, 1991), to
monitor strategy, ensure stakeholder needs are acknowledged
and acted upon, measure performance, and identify and mitigate
business risks (see Berry et al., 2009). Mostly, they act as
?custodians? of business decision making and evaluation
12
. In
some cases, a control has to check the performance of an
employee (such as his or her revenue performance). This is
different to when an actor is making a strategic business decision
drawing, for example, on a net present value calculation or a
customer profitability analysis. In other cases, they have to make sure that business strategies meet
predetermined goals and objectives (Lorange et al., 1986).
Such control mechanisms are critical to lifting firm performance and creating ?high performing workplaces?. In the
following sub-sections, we provide evidence of this. We show how management accounting practices, such as 1)
intellectual capital measurement and reporting, 2) management accounting controls systems (such as budgets
and performance targets) and 3) participative management accounting practices (such as participative budgeting)
affect firm performance and can result in higher levels of productivity, profitability and innovation.
12
As a consequence, behavioural management accounting research has gained increased traction in recent years. Such research focuses on
the behavioural implications of management accounting techniques and the effects of human behaviour and psychology on, for example, the
quality of financial reporting. Hall (2008, p. 141) finds that ?performance measurement systems influence managers‘ cognition and motivation,
which, in turn, influence managerial performance?. The effect is indirect through the mediating variables of role clarity and psychological
empowerment. See also (Lipe & Salterio, 2000; Luckett & Eaggleson, 1991). The key point to note is that management accounting controls
create boundaries for what is valued (and not valued), expected (and not expected), and how decision are made (and by whom). They create
transparency into desired (and sometimes undesired) areas of firm and individual performance. An accounting control can define space and its
organisation and make other elements dependent upon itself (Latour, 1981, p. 286).
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For the purpose of this review, ?high performing workplaces? are those that achieve high levels of innovation,
employee engagement, fairness and productivity. Contrary to the human resources literature (Huselid, 1995;
Huselid et al. 1997; see section 2.3. for more details), the management controls literature has not widely
embraced the term ?high performing workplaces?. Yet, many accounting studies have examined the relationships
between accounting, innovation, employee engagement and productivity and illustrated the many ways in which
controls create ?high performing workplaces?. In this section, we review this literature and evidence.
A challenge commonly pointed out by research is the constraints that management accounting controls can
impose on organisations. An example is when a strong focus on conformity to plans and targets prevents
innovation and longevity (Davila, 2005). Management accounting controls, if inappropriately designed or used,
can also have negative implications on staff involvement in decision making and the well-being of people at work
(Malina & Selto, 2001). Furthermore, a fixation on myopic, short term financial targets (influenced in part by capital
market investors‘ focus on short-term returns) can compromise investments into a firm‘s intellectual capital base,
limit its long term health and create ?anorexic? organisations.
A high performing organisation is one which understands well the tensions surrounding the design of
management accounting controls systems. It is one which acknowledges that such tensions exist and seek to
maintain a healthy balance between competing objectives, such as:
? A historical and narrow focus on financial outcomes versus a forward-looking focus on intellectual capital;
? The exploitation of current products and services versus exploration of new opportunities and strategies;
and
? A too strong focus on reducing deviations and alignment versus maximising employee involvement and
diversity.
In this review, we discuss some of these tensions. These involve considerations of how accounting controls can
be used to balance individual and collective learning, such as intellectual capital reporting that is used to report
and manage the development of a firm‘s portfolio of knowledge resources (i.e. the resources that embody the
firm‘s knowledge and intangible capital). These tensions also focus on the characteristics of accounting controls in
innovative firms. Some tensions can also be found around the degree of involvement and participation of
employees and middle management in devising strategies and goals. Involvement can provide diversity and
creativity to the development of strategies and goals, but the potential cost is that it can reduce focus and create
confusion. High performing firms are hypothesised to be those that manage and address such tensions.
2.7.2. Intellectual Capital Measurement and Reporting
85
Financial accounts (such as P/L
statements and balance sheets) have
been criticised for focusing too much
attention on financial results setting
aside the intangible value drivers of the
business (such as customer orientation,
human capital, business systems and
processes, stakeholder needs etc.)
This study identifies the extent to
which high performing firms measure
and report on their intellectual
capital, and the effects this has on firm
performance.
Previous research has found that those
firms that measure their intellectual
capital and incorporate such
information into strategy making and
resource allocation outperform those
who don’t (Ittner and Larcker, 1998,
Youndt et al., 2004).
Financial accounts and accounting techniques (such as P/L statements, cash flow statements, balance sheets,
budgets) have been criticised for focusing too much attention on short term, financial results at the cost of setting
aside the intangible value drivers of the business, such as customer
orientation, human capital, systems and processes, and
stakeholder needs (Mouritsen & Boedker, 2009, Boedker et al.,
2005; Fincham & Roslender, 2003; Mouritsen et al., 2003; Lev,
2001; Petty & Guthrie, 2001; Sveiby, 1997)
13
. The balance
sheet does not recognise most intangible assets since these do
not meet the accounting recognition criteria of being
?controllable?, ?identifiable? and ?reliably measurable?. Treating
investments into people, research and development, technology
and process improvements as expenses (rather than assets),
creates a series of problems: 1) it can prevent management
intervention; 2) it means that managers are disinsentivised,
even penalised, for investing in intangibles; and 3) it results in
too strong a focus on short term results. Malina and Selto
(2001) and Luft and Shields (1999) explain that financial
indicators tell a story of how the firm has performed in the past,
but shed few insights into how the firm is positioned to create
value for customers, shareholders and others into the future.
Hence, a focus on financial indicators alone is too narrow and
short-term focused. Fitz-enz (2000, p. 249) describes this challenge as
follows;
The accounting function does a fine job of telling the state of our past and present financial health. But it
says nothing about the future. Additionally, it does not speak to human capital issues. To see the future,
we need leading indicators. These indicators tell us the state of our human capital, as we prepare for
the future.
These problems have led practitioners, academics and others to argue that management accounting practices
need to be modified to incorporate consideration of a firm‘s intellectual capital. Accountants should adopt a more
strategic management accounting approach and focus on the evaluation, appraisal, and measurement of
intellectual capital to avoid neglecting what may be the organisation‘s most valuable resources (Tayles et al.,
2002). Instead of a narrow focus on return on investment and financial measures alone, emphasis is now on
measuring customer satisfaction, product quality, employee satisfaction, market share, and relational capital
(Kaplan & Norton 1996; Otley 1996). Greater consideration of a firm‘s intellectual capital needs to be built into
13
Some researchers also point out that traditional accounting and accounting-based performance management are inappropriate given
today‘s uncertain economic and complex competitive environment (Ballantine & Brignall, 1995; Govindarajan & Shank, 1992; Bromwich &
Bhimani, 1989).
86
performance management, risk management, capital investment, budget and control, and stock market
investment decisions (Tayles & Sofian, 2007).
Intellectual capital measurement and reporting thus offers an extension to traditional financial accounts - one that
broadens insights into business performance and its value drivers. Marr et al. (2003) point out that intellectual
capital is of strategic importance to firms (see also, Grant, 1991, Sveiby, 1997, Stewart, 2001, Andriessen &
Tissen, 2000, Teece, 2000). Indeed, a firm‘s real competitive edge is said to be located in the quality of its
relationships, structures, and people (Segelod, 1998). Hence, measuring and reporting on this aspect of firm
performance is critical to value creation.
The following sub-sections review research studies on the techniques and frameworks that firms can put in place
to manage intellectual capital, and the advantages to firms that do so.
Intellectual Capital Frameworks and Measures
A firm‘s intellectual capital is said to be its invisible resources (Sveiby, 1997). Relations with customers or systems
and processes are not readily visible to the human eye (Boedker et al., 2005). This poses a challenge to
managers and others. When intellectual capital is not readily visible to the human eye or recordable in financial
accounts, it risks being overlooked and under-prioritised from a strategic management perspective.
In the early 1990s, various performance measurement frameworks were developed to overcome the shortfalls of
financial-only measures (Bourne et al., 2000) and increase visibility into a firm‘s invisible resources. Such models
record and report on a firm‘s intangible resources, such as key customers, internal processes, human capital and
learning (Amir & Lev, 1996). Intellectual capital reports make ?the invisible visible? (Boedker et al., 2005). Visibility
in turn means that intellectual capital and knowledge resources become open and amenable to management
intervention (Mouritsen et al., 2001; Mouritsen & Boedker, 2009). Once recorded in accounts of performance
(such as intellectual capital statements), intangible resources become dislocated and transformed from something
internal to the person into something that is the effect of a collective arrangement. Through intellectual capital
statements, the dark, tacit knowing of individuals comes into the open space. What was once internal is now open
and amendable to management interventions (Mouritsen et al., 2001, p. 736). Intellectual capital statements and
measures thus help ensure intangible resources get the management attention they are in need of. Commonly
used frameworks and models include the:
? Intangible Assets Monitor (Sveiby, 1997);
? Skandia Navigator (Edvinsson & Malone, 1997) which was particularly developed with intellectual capital
in mind;
? Balanced Scorecard (Kaplan & Norton, 1996; 2001; Lipe & Salterio, 2000) which had a more general
strategic focus; and
? Intellectual Capital Statements (Mouritsen et al., 2003).
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Yet, Tayles and Sofian (2007) find that established performance measurement frameworks, such as those listed
above, are not strongly featured across firms (see also Chenhall, 2005; Ittner, Larcker and Randall, 2003)
14
. They
point out that measuring organisational health in terms of customers, processes, relationships and employees
often takes place outside of a formal framework or model.
Hence, future research should focus more generically on the extent to which a firm measures and reports on its
customer relations, employee health, relational capital, business processes, and stakeholder needs. A survey of
1016 company directors by McKinsey Consulting (2005) illustrates the types of information that company directors
are looking for more information about (see Figure 2).
Figure 2: Changing Information Requirements of Company Directors
Facts at a Glance
In order of importance, the 1016 company directors surveyed in the McKinsey survey
wanted to know more about:
1. Market Health
Customer profitability/satisfaction, competitors‘ market share and products,
suppliers, brands.
2. Organisational Health
Employee retention/satisfaction, capabilities and skills, organisational
structure, culture, values.
3. Network Health
Regulatory changes, government policies, public opinion, community views.
4. Financial Performance
Cash, costs, EBITDA, margins, return on capital.
5. Operational Health
Buildings, inventories, patents, product pipeline, production rates.
Source: McKinsey (2005)
The survey also points out that a current lack of information about intangible assets may compromise the ability of
company directors to fully understand the objectives of and risks to their companies.
Impacts and Effects of Intellectual Capital Management and Measurement Practices
A greater focus on intellectual capital management has been said to provide a variety of advantages to
organisations. These include, but are not limited to, greater capacity of the firm to deal with economic uncertainty,
14
This is a point also made by Hall (2009). He states (PAGE #) that ?recent research indicates that the information dimensions of
management accounting practices, such as performance measurement systems (PMS), are not captured effectively by labels such as the
balanced scorecard?. In particular, Ittner, Larcker, and Randall (2003) argue that researchers need to devise improved methods for
determining what firms mean by contemporary PMS.
It should also be noted that Becker and Huselid (1998), Huselid (1995), and Huselid (et al. 1997), argue that systems of nonfinancial
measures, not individual measures themselves, appear to be more reliable determinants of firm performance.
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Social capital is the resources embedded
within, available through, and derived
from a network of relationships.
A firm can invest heavily in employee
training and education to lift innovation,
yet without the right collaborative
networks, it is less likely to be successful
in innovating.
“Unless individual knowledge is
networked, shared, and channelled
through relationships, it provides little
benefit to organisations in terms of
innovative capabilities” (Subramaniam
& Youndt, 2005, p. 459).
Thus, for a firm to effectively leverage
investments in human capital, it is
imperative that it also invests in its social
capital, including partnerships and
collaborative networks. This study
measures the social capital of
participating forms.
better decision making in strategy formulation and resource allocation, increased profitability, and greater
accuracy in capital market valuations. We discuss these below.
Competitive Advantage
Rapidly changing environments and business conditions suggest a growing need for strategic flexibility. High
levels of intellectual capital assist with this. Respondents in Tayles and Sofian‘s (2007) survey of intellectual
capital in Malaysian firms believed that high levels of intellectual capital helped them cope with economic
uncertainty. This supports the notion that firms rich in intellectual capital – particularly in the form of creativity,
intellectual assets, and relational capital – are better positioned to withstand, and even exploit, the effects of
unanticipated changes in markets and economies. It affirms previous research that a firm‘s real competitive edge
is located in its intellectual capital, including the quality of relationships, structures processes, people etc. (Grant,
1991, Segelod, 1998, Sveiby, 1997, Stewart, 2001, Andriessen & Tissen, 2000; Teece, 2000, Marr et al., 2003).
Strategic decision making and resource allocation
Marr et al. (2003) point out that when formulating a
corporate strategy it is not enough to just identify the
competitive forces, opportunities, and threats of the industry,
as suggested by Porter (1979). In addition, organisations
have to identify their corporate competence. This is most
often derived from intangible resources, such as the quality
of customer relations and human capital, in order to evaluate
opportunities (Andrews, 1971). According to resource based
theory, the question to ask is: does the organisation have
the right competence to pursue certain opportunities?
Andrews (1971) brings the strategic importance of
competences to a head when he states that opportunism
without competence is a path to fairyland.
Thus, a resource and competency-based strategy (Penrose,
1959; Wernerfelt 1984; Rumelt, 1984) is one that requires
visibility of, and investment into, a firm‘s intellectual capital.
Firms with a competency-based strategy are those that
understand well the relationships between intellectual capital, competitive advantage, and profitability (Grant,
1991). These are the firms that strategically identify, measure and invest in their intellectual capital in order to gain
a competitive advantage and increase their performance (Petergraf, 1993; Prahalad & Hamel, 1990; Teece et al.,
89
1997)
15
. What to measure and how to measure it is critical to the strategy formulation and resources allocation
processes. Indeed, what gets measured is often also what gets managed (Ridgway, 1956).
A notable point of differentiation between the intellectual capital literature and the HRM literature is that the former
often takes a broader perspective on the drivers of value creation and performance (see Youndt et al., 2004).
Research, for example, shows that an organisation‘s human capital and social capital in combination affect its
innovation capabilities. A firm can invest heavily in employee training and education to lift innovation, yet without
the right systems, processes and networks, it is less likely to be successful in innovating. Indeed, Subramaniam
and Youndt (2005, p. 458-9) find that, ?counter to our expectations, human capital had a negative influence on
radical innovative capability?. Individual expertise on its own was not conducive to radical innovation. Yet, the
interaction of human and social capital positively influenced radical innovative capability. This indicates that the
value of human capital is strongly tied to social capital. ?Unless individual knowledge is networked, shared, and
channelled through relationships, it provides little benefit to organisations in terms of innovative capabilities? (ibid).
Thus, for a firm to effectively leverage investments in human capital, it is imperative that it also invests in the
development of its social capital, including partnerships and collaborative networks. These provide the necessary
conduits for their knowledge workers to network and share their expertise. This finding has implications for skills
and training providers. The authors (p. 359) conclude that in ?today‘s more network-based organisations and
economy, it may be appropriate to move beyond traditional definitions of human capital that revolve primarily
around educational/functional skills to include competencies surrounding interpersonal interactions and
networking?
16
.
Profitability/Productivity
Said et al. (2003) hypothesise that firms that use a combination of nonfinancial and financial measures perform
better than firms that use financial measures alone. They find that nonfinancial measures are leading indicators of
future accounting-based performance. Yet, they also find that nonfinancial measures do not positively impact on
the current accounting performance as measured by return on assets. Their results are consistent with results of
previous studies, which provide evidence that nonfinancial performance measures are associated with
subsequent firm economic performance (Anderson et al., 1994; Banker et al., 2000; Foster & Gupta 1997). Said
et al.‘s (2003) study also indicates that the use of nonfinancial measures is significantly associated with: (1) an
innovation-oriented strategy; (2) a quality-oriented strategy; (3) the length of the product development cycle; (4)
industry regulation; and (5) the level of financial distress.
15
A practical example of a firm that has realised higher returns from measuring and investing it its intellectual capital is telecommunications
software company APiON, who developed and implemented a growth strategy that harnesses its intellectual capital (Peppard & Rylander,
2001). By investing in its people and customer relations, the strategy allowed APiON to realise a dramatic increase in shareholder value.
16
The authors (ibid, p. 359) go on to suggest that an ?organisation‘s efforts at hiring, training, work design, and other human resource
management activities may need to focus not only on shoring up their employees‘ functional or specific technological skills/expertise, but also
on developing their abilities to network, collaborate, and share information and knowledge.?
90
Ittner and Larcker (1998), using customer and business unit data, find support for claims that customer
satisfaction measures are leading indicators of customer purchase behaviour (retention, revenue, and revenue
growth), growth in the number of customers, and accounting performance (business unit revenues, profit margins,
and return on sales). See also Helmi (1998), and Yeung and Ennew (2001) for related studies on customer
indicators.
Youndt et al. (2004) examined intellectual capital in 208 firms. They researched how investments in (HRM),
information technology (IT), and research and development (R&D) provide differences in financial returns
17
and
Tobin's q
18
. Results indicate that a relatively small group of superior performing organisations exhibit high levels of
human, social, and organisational capital
19
. Most firms, however, tend to focus primarily on only one form of
intellectual capital, and a small group of underperforming organisations have very low levels of all three types of
intellectual capital. The researchers find that HRM, IT, and R&D investments are all very high in the group of
superior performing organisations that have high levels of human, social, and organisational capital. Furthermore,
firms with a high overall intellectual capital profile outperformed the low overall profile with regard to both financial
returns (9.52 per cent versus 1.21 per cent) and Tobin's q (3.97 versus 1.89). The high overall intellectual capital
profile exhibited financial returns at least 60 per cent greater than the uni-dimensional high human, high social,
and high organisational capital profiles. Being an intellectual capital ?specialist? does not result in superior
performance. Firms that do better need to invest in all three areas. As for Tobin's q, firms with a high overall
intellectual capital profile had a market-to-book value (3.97) two times greater than that of the low overall
intellectual capital profile (1.89). The study also showed that HRM and IT investments appear to influence
intellectual capital development more than R&D investments. More specifically, HRM investments tend to be
higher in firms with profiles high in human and social capital. The study also showed that investments in
information technology do in fact assist people in building social capital and knowledge webs in which knowledge
transfer and diffusion occur. Yet, this does not happen through the codification or institutionalisation of knowledge
as organisational capital. The authors (p. 355) explain that,
this is a surprising finding that is probably highlighting a persistent problem surrounding knowledge
documentation efforts: creating knowledge infrastructures and repositories may be quite simple, but
motivating people to provide the content to fill in the repositories and codify their evolving knowledge can be
quite challenging.
Hence, there is evidence to suggest that firms that identify, measure and invest in their intellectual capital achieve
higher levels of competitive advantage and ultimately higher levels of financial performance.
17
This was calculated by averaging an organisation's past two years ROA and ROE.
18
Tobin's q, is an indicator of market-to-book value. Future cash flows were estimated using Chung and Pruitt's (1994) simple approximation
where q = (market value + preferred stock + debt)/total assets. All performance data were obtained through Disclosure and Bloomberg.
19
Human capital represents the knowledge, skills, and abilities of employees. Social (relational) capital is the resources embedded within,
available through, and derived from a network of relationships. Organisational (structural) capital refers to an organisation's institutionalized
knowledge and codified experience stored in organisational memory devices such as patents, databases, manuals, routines, systems,
cultures, and so on.
91
Performance Measures, Employee Empowerment and Performance:
Hall (2008) investigates the effect of comprehensive performance measurement systems (PMS) on employee
empowerment
20
. A comprehensive PMS is one that provides performance measures that describe the important
parts of the operations. It integrates measures with strategy across the value chain and this can provide a rich and
relatively complete picture of the performance of the business unit (Chenhall, 2005; Ittner, Larcker, & Randall,
2003; Kaplan & Norton, 2001; Malina & Selto, 2001).
Hall (2008) hypothesises that empowered employees should perform better than those who are less empowered
(Liden, Wayne & Sparrowe, 2000). This is because empowerment increases both initiation and persistence of
managers‘ task behaviour (Conger & Kanungo, 1988; Thomas & Velthouse, 1990). In particular, higher levels of
psychological empowerment lead to greater effort and intensity of effort, persistence and flexibility (Spreitzer
1995; Thomas & Velthouse, 1990), all of which are behaviours that enhance performance (Mitchell & Daniels,
2003; Pinder, 1998).
Providing adequate performance information enhances the development of psychological empowerment.
Managers require information about the results of business operations to feel intrinsically motivated. Feedback
theories from psychology indicate that performance information can improve psychological empowerment by
providing information about task behaviour and performance (Collins, 1982; Ilgen et al., 1979; Locke, Shaw,
Saari, & Latham, 1981; Luckett & Eggleton, 1991). In particular, intrinsic task motivation is increased when
managers are provided with feedback about the results of operations (Ilgen et al., 1979). The greater the amount
of information provided on a job, the greater will be the motivating potential of the job (Ilgen et al., 1979). In
contrast, a lack of information about performance has adverse affects on feelings of empowerment (Chiles &
Zorn, 1995).
Hall (2008, p. 146) explains that a more comprehensive PMS provides the performance information necessary for
managers to develop higher levels of psychological empowerment. In contrast, a less comprehensive PMS
provides limited and inadequate performance information, and thus is likely to limit the development of managers‘
psychological empowerment.
Hall finds supporting evidence for the behavioural consequences of comprehensive PMS. A comprehensive PMS
influences managers‘ cognition and motivation, which, in turn, improves managerial performance. Psychological
empowerment acts as an intervening variable in the relation between comprehensive PMS and managerial
performance. Including the variables of cognition and motivation in research and work design can improve our
understanding of how management control systems affect managerial work behaviour.
20
Hall (2008, p. 145) explains that ?psychological empowerment refers to increased intrinsic task motivation manifested in a set of ?four
cognitions; meaning (the value placed on work judged in relation to an individual‘s own ideals or standards), competence (an individual‘s belief
in his/her capacity to perform a job with skill), self-determination (an individual‘s belief concerning the degree of choice they have in initiating
and performing work behaviours), and impact (the extent to which an individual believes they can influence outcomes at work) (Spreitzer,
1995; Thomas & Velthouse, 1990).?
92
Yet, Hall does not examine the effects of horizontal information sharing. An opportunity exists to examine how
horizontal information sharing, for example through joint target setting, affects firm performance (see also the
section on budgeting below).
Remuneration and the use of Intellectual Capital Measures
Evidence of the positive effects on performance of the use of nonfinancial performance measures in managers‘
compensation plans has also been noted during the past decade (Marr et al., 2003). For example, Chrysler
Corporation paid bonuses to its 200 top executives based on the attainment of vehicle quality and customer
satisfaction targets in addition to measures of profitability (Lavin, 1994); Ford Motor Company used an executive
compensation plan, similar to the plan used by Chrysler, which included nonfinancial customer satisfaction and
operational measures (Anon., 1998); and Ittner et al. (1997) report that 36 percent of the companies surveyed in
their study used non-financial measures in executive compensation.
Research has shown that linking remuneration to nonfinancial performance measures can have positive impacts
on firm performance. Harrah‘s Entertainment, (a US Gaming company), adopted a strategy to boost revenue
growth and profitability through a customer rewards scheme (Loveman, 2003). To support that scheme, the
company linked employee rewards to customer satisfaction. Hourly workers got paid cash bonuses for achieving
high customer satisfaction scores. Furthermore, the scheme was team-based, encouraging everyone to
participate and to share information on how to achieve high customer satisfaction scores. According to Loveman,
?In 2002, one property had record-breaking financial results, but employees did not receive bonuses because their
customer satisfaction scores were mediocre.? The strategy provided improved results. In 2002, the company
recorded a 14 per cent gain in revenues despite strong competition and compared to overall market growth of just
1 per cent.
Innovation
Research also shows a relationship between nonfinancial performance measures and innovation. Davila (2000)
finds that innovative firms use many more types of management controls than do less innovative firms. He
particularly finds that the use of intellectual capital/non-financial measures is significant in innovative firms. He
explains that management control systems in new product development cannot be restricted to traditional
accounting measures but needs to encompass a broader set of measures. Chenhall and Morris (1986) similarly
claim that in innovative firms, more broad-based information sets are used. Simons (2005) makes a similar point
in his description of job design. He looks at four basic spans of a job, including control, accountability, influence
and support, and examines how a manager‘s job can be configured differently in these four domains to help the
business realise its performance potential. Table 6 summarises Simons‘ four spans. The Span of Control
measures the breadth of resources (people, assets and information) the company makes available to the
manager
21
. The Span of Accountability is the type of goals the manager is expected to achieve and which he/she
21
Simons (1995, p. 58) provides practical examples. He explains that ?the spans of control for a store manager and a merchandising manager
at Wal-Mart are quite different. To ensure standardization in operations, Wal-Mart gives the store manager relatively little control. To promote
93
is evaluated on
22
. This can be ?narrow? measures, such as cost of goods sold, or ?wide? measures, such as brand
profit or customer satisfaction. The Span of Influence is the extent to which the manager depends on other people
to do his/her job. The Span of Support shows the degree of commitment of help from others within the company.
Simons (1995, p. 57) explains how narrow versus wide performance measures can increase innovation when a
manager has a narrow span of control;
in high-performing organisations, many people are held to broad performance measures such as brand
profit and customer satisfaction, even though they do not control all the resources - manufacturing and
service, for example - needed to achieve the desired results. There is a good reason for this
discrepancy. By explicitly setting the span of accountability wider than the span of control, executives
can force their managerial subordinates to become entrepreneurs.
Table 6: The Four Spans of Job Design
Narrow – (embedded
diagnostically)
Wide – (embedded
interactively)
Span of Control
Breadth of resources available to job
holder (people, assets &
infrastructure).
Reduces resources Increases resources
Span of Accountability
Type of goals the job holder is
expected to achieve.
Narrow metrics such as budget
line items or head counts.
Uses broader measures such as
customer satisfaction or profit.
Span of Influence
Extent to which the manager
depends on other people to do his /
her job.
Focused only on their own job, a
single reporting line.
The extent to which an individual
must interact extensively with,
and influence, people in other
units.
Span of Support
The degree of commitment of help
from others within the company
Low support or commitments of
help from other units.
Strong commitments of help from
other units.
Adapted from Simons (2005, p. 57)
Capital market valuations
Capital markets are calling for more reliable and measurable information regarding intangible assets, such as
strategic direction, risk factors, experience, integrity and managerial qualities (Eccles et al., 2001). This demand
for broader sets of information is, in part, being met by intellectual capital reporting. Some information is
communicated through annual reports, stakeholder reports, or intellectual capital statements (Guthrie, 2001;
the implementation of best practices, the company gives the merchandising manager a "wide" setting.? Turning to the span of influence,
widening it can counteract ?the rigidity of organisational structures based on boxes and silos. For example, although global companies like
Procter & Gamble need to be responsive to local customers' needs, they must also create pressure for people in different operations to look
beyond their silos to consolidate operations and share best practices to lower costs? (Simons, 1995, p.57). Lou Gerstner took charge of IBM in
1993, and Simons uses Gerstner‘s restructuring of the business as examples of span adjustment, ?narrowing the spans of control and
widening the spans of accountability for marketing and sales units. At the same time, he widened the spans of influence by formally pairing
product specialists with global industry teams, which worked closely with customers. To widen the spans of support, the company reconfigured
bonuses to give more weight to corporate results than to business-unit performance.? (Simons, 1995, p. 62).
22
Simons hypothesises that when the span of accountability is greater than the span of control, entrepreneurship will increase. ?The level of
an employee's accountability, as defined by the company, directly affects the level of pressure on him to make tradeoffs; that pressure in turn
drives his need for organisational resources? (Simons, 2005, pp.59). Also, if the span of influence increases and the rigidity of the
organisational structure decreases then innovation will go up.
94
Mouritsen et al., 2001), whilst other information cues are provided through private channels, such as
presentations to analysts (Holland, 2003; Garcia-Meca et al., 2005).
AMP, one of Australia‘s largest fund and wealth management companies, calls for a ?New Era in Company
Evaluation? (see Figure 3). They have started to analyse more dimensions of company performance, including
how companies manage their human capital, customer and community relations, supply chain, and brand values.
Often, they find that intellectual capital is critical to firm competitiveness.
Figure 3: Changing Information Requirements of Capital Markets
Source: Sustainability Alpha Team, AMP Presentation, Sydney, Australia, February, 2007
Higher levels of information disclosure and insights into business performance via intellectual capital reporting can
positively affect a firm‘s standing in capital markets. Intellectual capital information can reduce transaction costs
and uncertainty, and voluntary disclosures have proven to be beneficial to investors (Lev, 1992; Botosan, 1997;
Healey et al., 1999; Leuz & Verrechia, 2000). Guo et al. (2005) find that information about product development,
research and development and the competitive environment reduces information asymmetry and assists the
pricing of initial public offerings. Thomas (2003) examines the impacts of intellectual capital reporting with financial
analysts in the United Kingdom using an experimental design. She finds that an increase in disclosure of
intellectual capital information leads to a tighter range of share price estimates and a reduction in beta, resulting in
a lower cost of capital.
Yet, diversity in reporting formats and inconsistency in content across companies and time periods can make it
challenging for capital market players to adequately consider a firm‘s intangible value drivers and incorporate
these into firm valuations (Amber et al., 2001). There is also no coherent reporting framework in place. And
accounting standards bodies have had little success with increasing disclosures or putting into place reporting
standards.
95
Hypotheses:
? Firms with higher investment in intellectual capital achieve higher levels of performance.
? Firms that measure and report on their intellectual capital achieve higher levels of performance.
? Underperforming organisations (as measured by financial performance and innovation) have lower levels
of intellectual capital and higher performing organisations have higher levels of intellectual capital.
? Firms that use comprehensive performance measurement systems achieve higher levels of employee
empowerment (or commitment, see Nouri & Parker, 1998 below) and performance.
? Firms that use comprehensive performance measurement to determine staff remuneration achieve higher
levels of performance.
? Firms with higher levels of transparency via intellectual capital reporting (to staff, boards, investors and
others) experience higher levels of performance.
? Firms where the Board monitors intellectual capital performance achieve higher levels of firm
performance.
? Firms with higher levels of social (relational) capital (as defined by the resources embedded within,
available through, and derived from a network of relationships) experience higher levels of innovation.
2.7.3. Management Accounting Controls and Innovation
A central property of high performing organisations is innovation: the development of new products, services and
processes. On the one hand, innovation requires organisations to develop and explore new ideas which will bring
future benefits; but on the other hand, organisations also need to exploit existing products and processes in order
to gain benefits in the present. This concept, developed by March (1991) is known as ?ambidexterity?. There is
growing evidence to support the view that ambidexterity promotes organisational growth and adaptation (see
Govindarajan & Trimble, 2005; He & Wong, 2004; Markides & Charitou, 2004; Tushman et al., 2007). There is,
however, some confusion in the use of the term. In the view of O‘Reilly and Tushman (2008, p. 41), ?ambidexterity
is a specific capability embodied in senior leadership's learning and expressed through their ability to reconfigure
existing organisational assets and competencies in a repeatable way to adapt to changing circumstances?.
Tushman et al., (2007) show that ambidextrous designs are more effective than functional, cross-functional or
spin-out designs, and that switching to an ambidextrous design was associated with increased innovation.
Further, the performance of existing products is higher in ambidextrous organisations. Other studies have
suggested that the combination of exploration and exploitation is associated with longer survival (Cottrell & Nault,
2004), better financial performance (Govindarajan & Trimble, 2005; Markides & Charitou, 2004), and improved
learning and innovation (Adler et al., 1999; Holmqvist, 2004; Katila & Ahuja, 2002; McGrath, 2001; Rothaermel &
Deeds, 2004). Thus, although ambidexterity is a difficult managerial challenge, often these complex designs of
organisational forms and associated management accounting control systems are associated with sustained
competitive advantage.
As March (1991, p. 71) explains,
96
Exploration includes things captured by terms such as search, variation, risk taking, experimentation, play,
flexibility, discovery, innovation. Exploitation includes such things as refinement, choice, production,
efficiency, selection, implementation, execution. Adaptive systems that engage in exploration to the
exclusion of exploitation are likely to find that they suffer the costs of experimentation without gaining many
of its benefits … . Conversely, systems that engage in exploitation to the exclusion of exploration are likely
to find themselves trapped in suboptimal stable equilibria.
Management accounting controls (like budgets, profit planning systems, brand revenue systems, intelligence
systems) are important to ambidextrous designs. Depending on how they are used, they can assist managers to
both exploit and explore. In ?exploit? situations, they are typically used to help the organisation progress towards
predefined strategic intents or goals. An example is when performance measures are used to track progress
towards goals and compare outcomes to expectations. The aim is to reduce deviation from strategic intent and
goals, and to monitor performance. In this mode, deviations are to be avoided and there is a lesser focus on
innovation.
In contrast, in ?explore? situations, management control systems are used to identify emerging opportunities and
threats. An example is when a new service opportunity emerges and an organisation has to consider what to do
about it. In this mode, there is generally more focus within the organisation on innovation, and interactive
management controls are one way that the firm can organise itself accordingly (Simons, 1995).
Managers can thus use management accounting controls to make decisions about the relationship between the
exploration of new ideas for the future and exploitation of existing ideas for the present. Management accounting
controls help organisations to appreciate when innovation should be enabled and extended, and when innovation
should be constrained and reduced. Simons‘ (1995; 1987; 1990; 1991; 1994; 2000; 2005) distinction between
interactive and diagnostic use of management control systems reflect these two situations (see Table 7).
97
Table 7: Differences between Interactive and Diagnostic Use of Management Accounting Controls
Diagnostic use of management
controls (Exploit)
Interactive use of management controls (Explore)
? The main aim of controls is to
implement established
strategy.
? Controls ensure that
managers‘ activities are
directed towards predefined
goals.
? Controls align or tie the
organisation together.
? Deviations from the plan are
undesirable and should be
corrected.
? Controls have a historic
focus.
? The main aim of controls is to continually explore and
identify new and emerging strategic opportunities and
threats.
? Controls encourage managers to continually challenge
their assumptions about the business, market, and action
plans and explore new strategies.
? Controls encourage diversity in thinking and allow
managers to question and revise their goals.
? Deviations from the plan are opportunities for learning and
change.
? Controls have a forward looking focus.
Source: Adapted from March (1991) and Simons (1995)
Importantly, the significance of a management control lies not so much in the nature of the tool but rather in how it
is used. Davila (2005) illustrates how the same control tool – in this example, a product development manual –
can be used either diagnostically or interactively. He traces two different interpretations of product development
manuals in two companies to illustrate this:
Both companies were in the medical devices industry. A first look at their product development
processes would suggest that both had good processes in place, with stages and gates, clear
procedures, and checklists to coordinate the support activities of all departments. However, when
talking with the managers of the process, two distinct realities emerged. In the first company, the
manager saw her job as disciplining the project teams to follow the routine. She made sure that all
the documents were in place, that every gate was properly documented, that every step in the
process was carefully followed. Her objective was to maintain the routines – no change and strict
adherence to it, which she saw as a blueprint to be closely followed. She perceived deviations from
the manual as exceptions that required corrective action. Her interpretation of the manual was a
system to capture and code new knowledge. Project managers saw her role as controlling them. In
contrast, the manager in the second company saw her role very differently. She saw the routine as
an evolving adaptive tool. She sat down with project teams to tailor the process to the project‘s
needs, to make sure that the routine provided value to the teams. Not only was the routine adaptive,
most importantly, the manager reviewed each finished project with the project team to update the
product development manual and make it more helpful the next time. Deviations from expectations
were opportunities to bring about improvements to the current processes. The manual was alive,
constantly evolving and incorporating learning. The product development manager saw
management control systems as not only helping execution but also capturing learning, which in the
former company was lost.
In the following sub-sections, we discuss in more detail the differences between diagnostic and interactive use of
management controls.
98
Diagnostic Use of Controls
Simons (1995) compares the diagnostic use of controls to the control panel of an aircraft. The control panel
enables the pilot to scan for signs of abnormal functioning and to keep critical performance variables within
present limits. He uses the analogy to argue that companies similarly use management controls to, ?help
managers track the progress of individuals, departments or production facilities towards strategically important
goals? (P. 81). Feedback from this process allows management to alter and finetune inputs and processes so that
future outputs will more closely match goals. As such, they monitor performance and set boundaries for employee
behaviour.
Another practical illustration of a diagnostic use of a management accounting control is the monthly financial
budget used to check organisational or business unit performance against target. The information is used by
senior management to monitor operational performance and if required take corrective action. Furthermore, the
focus is historic, i.e. the previous month or accounting period.
When used diagnostically, the aim of the management accounting control is to regulate and channel employee
activity so that the organisation exploits existing products and processes in order to gain benefits in the present.
Diagnostic use of control systems is oriented towards reducing the uncertainty facing subordinate managers by
formulating and delegating clear goals and priorities. Hence, diagnostic use of management accounting controls
need not be a negative experience for employees. Indeed, Marginson and Ogden (2005) find that budgets have a
positive, ?comforting? role to play in an individual's work experiences. Managers confronted with uncertainties
associated with role ambiguity responded by becoming positively committed to achieving budgetary targets as
budgets offer a source of structure and certainty. The use of budgets as an antidote to role ambiguity is a powerful
influence on the manager's budgeting behaviour. Storey et al. (1997) similarly explain that a sense of satisfaction
was expressed by managers in companies with demanding targets since these firms appear to know where they
are going and what they want from their managers. Managers generally appreciated the sense of strong direction
from the top, as expressed in the detailed specification and tightness of their performance targets. They
welcomed the sense of certainty and mission this communicated.
Hence, diagnostic use serves to make the organisation predictable by reducing uncertainty and promote clarity of
goals and objectives. This situation can possibly give rise to certain kinds of innovation, possibly the so-called
incremental innovation, where individuals have discretion over how goals and strategic intents are achieved and
may improvise along the way. Yet, a main aim of the exploit mode and the diagnostic use of management
accounting controls is to monitor the implementation of predefined goals and ensure these are achieved. This is
how diagnostic use of management accounting controls works; it implements strategy by taking formulated key
performance indicators literally.
Interactive Use of Controls
Whilst diagnostic use of controls seeks to eliminate deviation, interactive use of controls seeks to explore
emerging opportunities and threats, thus facilitating learning and innovation. Simons (1995) describes interactive
use of control systems as scanning mechanisms. They are, ?formal information systems that managers use to
99
Management accounting controls
(such as budgets, targets and plans)
affect business performance. When
used diagnostically, controls aim to
eliminate deviation and monitor
progress towards predefined goals.
This can increase productivity, yet it
may hamper innovation.
In contrast, when used interactively,
controls help managers to challenge
existing thinking and explore strategic
uncertainties that emerge in the
market and elsewhere. This makes
the firm more innovative and starts a
dialogue that crosses many
organisational divisions.
The survey will examine the use of
management accounting controls and
its impact on firm performance.
involve themselves regularly and personally in the decisions of subordinates, (and through them) senior managers
participate in the decisions of subordinates and focus organisational attention and learning on key strategic
issues? (p. 86). He also cites interactive controls as necessary to overcome limitations of information sharing as
companies grow. They are a precondition necessary, ?to share emerging information and to harness the creativity
that often leads to new products, (or services) line extensions, processes and even markets? (p.86).
A practical illustration of the interactive use of a control is the profit-planning system at Johnson and Johnson.
According to Simons (1995, p. 88), this system is used interactively to,
focus attention on the development and protection of innovative products in its various markets.
Managers periodically reestimate (sic) the predictive effects of competitive tactics and new product
rollouts on their profit plans for the current and following year. The recurring questions posed by
managers are: What has changed since the last forecast? Why? What are we going to do about it?
The results are new ideas and action plans.
It can be seen from the example above that interactive
management accounting controls demand regular attention
from operating subordinates at all levels of the company.
Interactive use is different from diagnostic use of management
controls because it focuses more on attempting to understand
the strategic uncertainties pertaining to an organisation.
Simons (1994) shows that use of interactive systems is related
to an aspiration to identify and learn about strategic
uncertainties arising from external changes in customer-
relations and socio-economic conditions and internal changes,
i.e. the development of knowledge resources and
organisational competencies. Furthermore, interactive use of
accounting control systems is collective and mobilises many
actors in the organisation to help interpret uncertainties
pertaining to the established strategy. Interactive use makes
the interpretation of information a broad and collective affair
(Simons, 1987; 1991; 1994). Interactive use of diverse
management accounting control systems makes it possible to explore short term and long term strategies by
stimulating face-to-face dialogue and building information bridges across hierarchical levels. In this way,
interactive control systems are helpful in overcoming organisational silos and bringing together people who may
not regularly engage in frequent dialogue or the exchange of ideas and knowledge.
Empirical research supports that interactive use of management accounting controls is related to firms that
conduct innovation. Bisbe and Otley (2004) show that when environments are complex and dynamic, firms‘ use of
management control systems foster dialogue and interaction about the development of products and markets, and
innovation is supported by interactive use of management control systems particularly if innovation levels are low.
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Also, Henri (2006) finds that interactive use of management control systems influence innovativeness positively.
According to Bisbe and Malagueño (2009), higher levels of interactive use of controls systems are associated with
a greater emphasis on innovation activities.
Abernethy and Brownell (1991, p.192) similarly suggest that,
interactive use of budgets, with its focus on dialogue, communication and learning, between top
management and subordinates as well as among managers at the same level, is consistent with
the operation of cross-functional liaison groups. Indeed, it can be seen, itself, as an integrative
liaison device that breaks down the functional and hierarchical barriers that inhibit information flows.
In a later study, Abernethy and Lillis (1995) find that ?spontaneous contact? and ?integrative liaison devices?, which
allow regular, personal and intensive contact are more prevalent in flexible manufacturing firms while traditional
performance measurement systems are de-emphasised.
Below are a set of suggested priorities for management controls that emphasise the interactive use of
management control systems that increase innovation in firms (adapted from Davila, 2009):
1) Explore Uncertainty. If used interactively, management accounting controls increase the number of
aspects of a situation. This may sometimes increase uncertainty because the situation will be understood
more realistically. Increased uncertainty or at least ambiguity may trigger more innovative responses.
2) Make goals provisional. When learning happens via interactive use of management control systems it is
possible to realise that goals may not be appropriate and that it is possible to conceive of quite different
actions to help the firm overcome obstacles.
3) Change learning from past. Interactive use of management accounting control systems may make
organisational participants aware that certain rules of thumb about the functioning of the firm and its
environment may be erroneous. Learning is required when the past is not a good guide in solving the
problems of the future.
4) Develop coordination. Interactive use changes the conventional idea of coordination from one of
decoupling the efforts of organisational actors to one of high coupling of their actions. Interactive use of
management accounting control systems ask organisational participants to intervene often so that, during
decision making situations, the many perspectives of any strategies‘ uncertainties are considered.
5) Plan the voices to be heard. Rather than planning the process and sequences of steps, interactive use of
management accounting controls focuses on mobilising all that may add value to the dialogue. This is a
not a sequential model of interdependent actions, but rather a hub (Mintzberg & van der Heyden, 1999)
where all relevant participants are gathered and have to be heard before all can go in a common
direction.
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6) Make accountability lateral and social. For accountability to work, it must be mediated by social
encounters where participants can react to the propositions made by others. Only then is it possible to
take into consideration the complex interdependencies that exist in modern organisations.
7) Symbols to legitimise. Interactive use of management accounting controls may use many symbols and
visionary objects such as mission statements because many of the products and processes to be
developed (in the future) are not really conceptualised at the time of interactive engagement.
Summary
This section has illustrated the significance of diagnostic and interactive use of management accounting controls
(such as budgets, business plans, targets, etc) to firm performance and explored the effects of management
accounting controls on innovation. It has shown that firms can use management control systems both
diagnostically and interactively. In general, diagnostic use of management accounting controls aims to eliminate
deviation and monitor progress towards predefined goals and this reduces innovation activity
23
. The aim here is to
ensure the firm exploits existing products and processes to deliver benefits for the present. In contrast, interactive
use of management accounting controls helps managers to challenge existing thinking and explore new
opportunities and threats that emerge in the market and elsewhere. The aim is to make the firm innovative
through a dialogue that crosses many organisational divisions, such as service and product groups and back
office functions. This shows the ambidextrous character of innovative firms, which in some situations have to
exploit, and in others, to explore. Importantly, firms most often have to conduct both activities contemporaneously.
Hypotheses:
1. High performing firms use management accounting controls diagnostically to eliminate deviation and
monitor progress towards predefined goals. The aim is to ensure that the firm exploits existing
products and processes to deliver benefits for the present.
2. High performing firms use management accounting controls interactively to challenge existing
thinking and explore new opportunities and threats that emerge in the market and elsewhere. The aim
is to make the firm innovative through a dialogue that crosses many organisational divisions and
enable learning.
3. High performing firms use management accounting controls both diagnostically and interactively.
They manage well the challenge of ambidextrous designs.
23
Yet, there is also some research that shows that diagnostic use of controls is required for innovation to unfold. Formalisation – the process
of turning activity into a documented routine or protocol - is sometimes a value add, even a requirement, for innovation. While innovation is
often associated with flexibility and creativity (Simons, 1995) organisations must still exercise adequate control and formalise the procedures
that ensure new ideas are turned into products, processes or services. Simons (1995) for example points out that diagnostic use of
management controls can be particularly important in environments characterised by a high level of uncertainty, even chaos. Chapman (1998,
p. 738) used four case studies to conclude ??that accounting does have a beneficial role in highly uncertain conditions?. Howard-Grenville
(2003) used an ethnographic approach in one high-technology company to document the relevance of organisational routines to confront
uncertain and complex situations. Uncertainty provokes a constant shift of priorities that may undermine the innovation process. Management
controls, such as targets and measures, increase stability and visibility, facilitate convergence in meaning across organisational actors, and
provide the clarity that creativity is argued to require.
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Employee involvement in strategy
making is critical to firm
performance. We survey how ‘deeply’
into organisational hierarchies
strategy-making extends and propose
that those firms with superior
performance are those that excel at
involving employees at all levels in
the strategic planning process.
This makes strategy an ‘anti-heroic’
affair where those closest to the
customer are involved in designing
the future directions of the firm.
2.7.4. Management Accounting Controls that Increase Employee Participation and Involvement
Control systems are put into place to define rules and erect boundaries for what can and cannot be done in
organisations. However sometimes rules and controls can be so tight and top-down driven that they constrain and
limit an individual‘s performance. They can, for example, prevent lower level staff from making a contribution in
areas where they have better answers to problems than those ?above?. The tension, here, is how to enable and
empower people to participate in decision making and lead change, yet also steer their focus and behaviours in a
common direction so as to ensure goals and targets are met and reduce risks of drift and wasted resources.
Research shows that firms that involve their employees in key decision making processes (such as setting and
implementing strategy, building budgets, designing targets etc) experience higher levels of performance
(Harrington, 2006, Vila & Canales, 2008).
Employee Involvement in Strategic Decisions and Implementation Tasks
Harrington (2006) found that firms using high involvement management tactics during strategy decisions and
implementation produced up to a 9 per cent better overall firm performance (a measure based on profitability,
financial and stock price performance), compared to firms that used
low involvement management tactics. This difference in overall firm
performance was 2 - 3 per cent for all firms in the study, but grew to
approximately 9 per cent in the case of small firms. Size was also
important in the comparison of firms with high and low numbers of
operating units. The lower the number of operating units, the higher
the correlation between high involvement tactics and superior firm
performance.
Similarly, the famous Sears case study (Rucci et al., 1998)
illustrates that a bottom-up approach to strategy-making has
significant financial benefits. By increasing involvement of staff
across all levels of the organisation, Sears was able to improve
employee attitudes and thus performance. They found that a change in
employee attitudes translated into an improvement in customer satisfaction and financial performance. The firm
developed a predictive model to track this. The model showed that ?a 5 point improvement in employee attitude
will drive a 1.3 point improvement in customer satisfaction which in turn will drive a .05 per cent improvement in
revenue growth? (Rucci et al., 1998, p. 91). Over a 12 month period, a change in employee attitudes translated
into an additional US$200 million in revenue, resulting in an increase in the company‘s market capitalisation of
one quarter of a billion dollars
24
.
24
It should be noted that a wider range of activities were implemented during the business transformation including the introduction of a new
leadership model, a team-based structure along with the creation of Task Forces, Town Hall Meetings and Action Planning. Sears also used
Learning Maps to enable employees to understand the business and their role in advancing the business; opened a university and introduced
learning and development programs; changed rewards and compensation including remuneration based on non-financial performance
measures; and developed new employment, promotion and appraisal criteria.
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On the other side, Melina and Selto (2001), in their study of the Balanced Scorecard, found that several factors
negatively affected employees‘ perceptions of the Scorecard and caused significant conflict and tension. One of
these was that communication about the Balanced Scorecard was one-way (i.e. top-down and not participative).
25
According to Melina and Selto (2001, p. 70),
....there was abundant evidence that the DBSC administrators' frequent use of One-way reporting is a
direct cause of Conflict/tension (16 causal links). Unfortunately, the Conflict/tension appeared to be
unproductive....... This may contribute to a climate of distrust and alienation that reduces the company's
and its distributors' effectiveness. The company imposed measures and benchmarks without seeking
input, and then used it as a diagnostic control and an evaluation measure. Distributors felt ignored and
trivialized because of their non-involvement. However, they have little recourse because of the frequency
of One-way reporting, which was a common complaint.
Some studies have also found that employee involvement brings about diversity in views and perspectives and
that this is a key driver of innovation. Along these lines, Bantel and Jackson (1989) and Judge and Zeithaml
(1992) found a negative relationship between top management team homogeneity and an openness to innovation
and change. Employee involvement increases diversity and this is seen to lift innovation and firm performance.
Barringer and Bluedorn (1999) find a positive correlation between employee involvement in strategic planning and
the intensity of corporate entrepreneurship. They theorise that the correlation is based on the facilitation of
opportunity recognition through contributions from a diversity of people (see also Dutton & Duncan, 1987),
including those who are closest to the firm‘s customers, whilst at the same time legitimising the active involvement
of middle- and lower-level managers in strategic processes. They (p. 436) explain that,
… a high level of employee involvement in planning facilitates firm-level entrepreneurial behaviour. This
result is supportive of the general notion that employee participation at all levels is an essential key to the
entrepreneurial process (e.g., Burgelman, 1984). The result is also consistent with Sathe's (1988)
observation that if entrepreneurship is to flourish in an organisation, lower-level managers need to be free
to identify and pursue promising opportunities. ... This result reaffirms the notion that control systems
capable of rewarding creativity and the pursuit of opportunity through innovation are an essential part of
the entrepreneurial process.
Barringer and Bluedorn (1999) also note the important issue of wide access to proprietary and potentially
sensitive information that is inherent in a strategising process involving a high number of people at various levels
in the firm hierarchy. Whilst this is a risk to the confidentiality of that information, it also points to the need for such
information to be widely accessible to facilitate a highly participative planning process.
25
Two other shortfalls were that: 1) measures are inaccurate or subjective; and 2) benchmarks are inappropriate but used for evaluation.
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Budget participation is when
employees are involved in and have
influence on the setting of budgets
and targets. High participation
includes frequent and wide ranging
discussions between superiors and
subordinates about budgeting issues.
Nouri and Parker (1998) find that
participation of middle and lower
levels staff increases a person’s
commitment to the organisation,
and lifts job performance.
The survey examines the extent to
which Australian firms have in place
participative budgeting processes and
the effects thereof on innovation and
productivity.
Participative Budgeting
Budget participation is the process in which individuals ?are involved in, and have influence on? the setting of
budgets (Brownell, 1982, p. 124). High participation includes frequent and wide ranging discussions between
superiors and subordinates about budgeting issues (Milani, 1975).
One of the important benefits of a participative budgeting process is the sharing of information between
organisational members (Hopwood, 1976). Shields and Shields (1998) point out that information exchanges
between subordinates and superiors during budget discussions are especially important with many possible
benefits for individual and organisational performance. High levels of participation and frequent information
sharing can also improve the level of commitment that an individual has to the organisation.
Shields and Shields (1998) review 45 studies which mention a
total of 62 assumed reasons for the existence of participative
budgeting. These are grouped into six categories: employee
motivation (23), share information (mostly vertical information
sharing) (22), employee satisfaction (13), reduce the need to
create slack (2), co-ordination (1), and job-related tension (1).
Nouri and Parker (1998) look at the impacts of a participative
budget process on performance and employee commitment.
Organisational commitment is, ?a psychological state linking the
employee to their organisations? (Meyer & Allen, 1997, p. 23). A
high level of commitment is when an employee has a strong
belief in the organisation‘s goals, strong willingness to help the
organisation reach its goals, and strong desire to maintain
organisation membership (Angle & Perry, 1981; Mowday, Porter
& Steers, 1982; Porter, Steers, Mowday & Boulian, 1974). Nouri
and Parker (1998) find that budget participation increases job performance directly and also indirectly via budget
adequacy and organisation commitment. The study also finds a direct effect between budget participation and
commitment, which illustrates that participation of middle- and lower-level staff in the budget process increases a
person‘s commitment to the organisation.
Parker and Kuj (2006) extend this and find that organisational commitment has a significant indirect effect on
performance through information sharing. That is, information sharing fully mediates the relation between
commitment and performance. Participative budgeting provides an opportunity to share information on problems
and opportunities with others and this enhances performance. In other words, individual performance is enhanced
when information sharing is high.
Nouri (1994) looks at commitment, involvement and budget slack. He hypothesises that two motivational factors
of organisational commitment and job involvement are important to explaining managers‘ propensities to create
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budgetary slack. Budgetary slack is when managers intentionally build excess requirements for resources into the
budget or knowingly understate productive capability (Young, 1985). Organisational commitment is when the
individual is highly committed to the organisation‘s goals and values and willing to exert considerable effort on
behalf of the organisation. Job involvement is defined as the degree of importance of one‘s job to one‘s self-image
(Lawler & Hall, 1970). Managers with a high level of job involvement may have a higher propensity to project their
jobs and self image in down periods, whilst managers with lower levels of job involvement may have less
propensity to create budgetary slack since they do not identify and care about their jobs. They are more
concerned with the organisation and meeting its overall objectives than defending their own position and job.
Survey data was collected from a sample of 203 supervisors and managers in a large multinational organisation.
The study confirms the hypothesis that organisational commitment and job commitment interact to create
budgetary slack. The important practical implication is that a company that effectively uses policies to increase the
commitment of managers to its goals and values will experience lower levels of budgetary slack. Devotion and
loyalty to the employer reduces the propensity to create budgetary slack and advance one‘s own position.
Mia (2002) looks at the relations between budget participation, an employee‘s level of motivation and attitude and
performance. She finds that participation in the budgeting process was associated with improved performance
when managers have a favourable attitude and higher levels of motivation. In contrast, when managers exhibited
a less favourable attitude and lower levels of motivation, performance was hampered. Mia‘s (2002) results support
the fundamental argument that an organisation may be better off following a budgeting style (participative or non-
participative) that is congruent with its employee attitude and motivation. If people‘s motivations are low, a non-
participative budget style may be more effective. If motivation is high, a participative budget style is more
effective.
Employee Involvement in Setting Budget Targets and Evaluation Criteria
Libby (1999) examines the relationship between the use of a fair budgeting process (including the setting of
budget targets) and subordinate performance. A fair budgeting process and target, as defined by organisational
justice theory (Greenberg, 1993), has two components: 1) the subordinate's involvement in the budgeting
process, called ?voice?
26
; and 2) the communication of a rationale for the subordinate's lack of involvement over
the final budget target the superior sets.
Libby (1999) points out that a challenge to the manager using a consultative budgeting process is that
subordinates may view the process as pseudo-participative. A pseudo-participative process is defined as a
budgeting process that leads subordinates to believe that they will have some influence on the budget that is set,
but in reality, their input is ignored (Argyris, 1952). Avoiding the perception that the budgeting process is pseudo-
participative is important because pseudo-participation can have de-motivating effects on subordinates (Pasewark
& Welker, 1990).
26
In the ?voice conditions‘, subjects were told that the budget target had been tentatively set at two hundred symbols, but they were given the
opportunity to communicate their preferred budget to the superior. In the ?no voice conditions‘, no opportunity for communication with the
superior was given.
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The communication of a rationale for the subordinate's lack of involvement over the final budget was found to be
important to performance. While managers can benefit greatly from subordinate input in making difficult allocation
decisions, they may not be able to act on them in all cases. Subordinates may become resentful and their
productivity may suffer. Providing subordinates with an adequate explanation for their apparent lack of influence
over the final budget the manager sets can lessen resentment and improve performance.
The results of Libby‘s (1999) study show that differences in performance can be explained by the different
processes under which the budget targets were set. Those employees who received both a voice and an
explanation for the budget target that was set perceived the budget and budgeting process to be significantly
fairer and had higher performance than those who had a voice, but received no explanation, and those who
received an explanation alone, and also those who received neither a voice nor an explanation. Results indicate
significant performance improvements when voice and explanation are combined.
Hirst and Lowy (1990) investigate the effects of feedback on performance. They find that feedback on goal
achievement affects job performance. Job performance was higher when managers were given more frequent
feedback on difficult goals. Importantly, the study found that budget goal difficulty in itself does not result in higher
performance. Both budget goal difficulty and budget feedback are necessary for high performance. This confirms
the importance of frequent interaction and dialogue between supervisor and employee in goal setting and
attainment.
Poon et al. (2001) argue that goal interdependence is increasingly important to firm performance given the
interdependencies between team members in achieving high levels of performance. Hence, how a manager
believes his/her goal relates to those of other team members affects performance. Deutch (1990) refers to
cooperative goal beliefs which arise where managers perceive that a successful outcome for one team member
helps other members to succeed. Individuals believe their goals are positively linked with those of other team
members. Team members will therefore gain personally by helping others to perform effectively. Cooperative
team members will tend to work closely with other members to resolve problems hampering budget attainment. In
contrast, managers with competitive goal beliefs believe their goals are negatively related with other team
members‘ success. Their success is frustrated by the success of others, and as one moves towards goal
attainment others experience difficulties in attaining their goals. This form of ?win–lose? contest leads to a lack of
mutual support and escalation of unproductive conflict.
Poon et al. (2001) find that within a participatory budgeting context, cooperative goals, as compared to
competitive goals, promote an open-minded discussion and strengthen team relationships, group productivity and
budget quality. Participative budgeting processes help managers and subordinates probe and resolve budget
issues, strengthen relationships, and improve budget performance. Participation in setting goals and targets
provides an opportunity for managers to work together creatively in identifying and managing common problems.
It increases the likelihood of developing cooperative goal beliefs which, in turn, improve performance.
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Yet, little research examines how vertical information sharing in participative budgeting can affect performance.
People in different teams or functional areas increasingly have to work together and depend on each other in
executing strategy and achieving goals. Thus, an opportunity exists to examine the extent to which vertical
information sharing in participative budgeting can affect firm performance.
Hypotheses:
? Firms with higher levels of employee involvement (in strategy making, strategy implementation, budgeting
and target setting) experience higher levels of firm performance (including innovation).
? Firms with participative decision making processes have higher levels of employee empowerment and
thus higher performance.
? Firms with higher levels of vertical knowledge/information sharing during budget processes (and in
general) have higher levels of performance.
? Firms that recognise/reward suggestions for improvement to work processes from staff have higher levels
of performance (including innovation).
2.7.5. Opportunities to Managers
This review has illustrated that management accounting controls (such as plans, target, procedures, manuals, and
budgets) play a significant role in creating high performing workplaces. They influence innovation, productivity,
fairness and staff engagement in various ways. Specifically, the section has illustrated that:
- Intellectual capital/nonfinancial performance measures play a critical role in lifting business performance.
They make invisible resources amenable to management intervention; they inform strategic decision
making and resource allocation; they guide the behaviour of staff (especially when tied to remuneration
and performance appraisals); they assist Boards and executives to monitor a firm‘s key value drivers and
long term health; and they help capital markets make better informed decisions and valuations.
- Management accounting controls also affect firms‘ innovation capacity in subtle (yet powerful) ways.
Coming up with the ?right? use of management accounting controls is a balancing act for managers, Chief
Financial Officers and CEOs alike. If used interactively, management accounting controls can produce
innovation effects while if used diagnostically they are directed at eliminating deviation and ensuring
conformity to pre-established targets. If controls focus too much on exploitation (i.e. diagnostic use), they
may limit innovation, learning and experimentation. On the flip side, if they focus too much on exploration
(i.e. interactive use), they can possibly create confusion, even slack and wasted resources. Ambidextrous
firms do both activities simultaneously. Yet, getting this use of management accounting controls ?right? is
a balancing act to managers and others.
- Employee involvement and participation is critical to lifting firm performance. Diversity increases
innovation. Furthermore, those employees closest to the customer often have the knowledge and ideas
required to create better value for customers. Higher levels of participation in, for example, budgeting and
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target setting processes, aids horizontal and vertical information flows and knowledge exchange, and thus
performance. It is no surprise that firms which design management accounting controls that increase the
involvement of employees in key decision making processes (such as strategy, participative budgeting,
target setting) experience higher levels of performance.
2.8. The Role of the Board in Creating a High Performance Workplace
The corporate governance reforms that have taken place over the past twenty years around the world have for the
most part been driven by concerns to restore or enhance investor confidence in the capacities of a board to
protect shareholders‘ interests from the potential distortions or damage of executive self interest. Informing this
orientation to the corporate governance problem has been a continuing series of corporate collapses which have
called into question the reliability of corporate financial disclosures and the adequacy of board, and in particular
non-executive director oversight of executive performance. The progressive strengthening of the specification of a
board‘s ?control function? in relation to areas such as audit and risk, remuneration and nomination, together with
increasing scrutiny of non-executive independence can all be seen as attempts to enhance the performance of
the board in relation to these control issues. This focus is supported conceptually by so called ?agency theory? in
which the problem of executive self interest is given prominence and remedied through the monitoring of
?independent? non-executives, disclosure and the use of incentives (Fama, 1980; Jensen & Meckling, 1976).
One possible unintended consequence of this focus of reform on the control function of the board is the relative
neglect of what the original Cadbury Committee in the UK termed the ?primary and positive? role of the board in
giving leadership to a business (Cadbury, 1992). The focus of this project on the creation of a high performance
culture within a business has the potential to shift the focus of research on corporate governance towards these
more positive potentials of board oversight. In particular, it draws attention away from the quality of external
disclosure, and associated conflicts of interest, to focus on issues of longer term business strategy and the drivers
of value creation both within the business and in relation to its markets and competition (Roberts et al., 2005).
In order to contribute to a company‘s high performance the board must first look to its own processes and there
are important differences here in how a chairman manages board processes, in chief executives‘ attitudes to the
role of the board, and in how non-executives seek to enact their role that shape the board climate and the focus of
its work (Walker, 2009). Of particular relevance may be board composition in so far as it brings relevant industry
and technical knowledge, and risk appraisal in relation to new product development.
A board has the rather intangible function of creating an environment within which an executive team leads a
business and in this way can do much to condition the climate and culture of an organisation. What the board
takes seriously or ignores, what it insists upon or neglects, sends strong signals to the executive team and the
rest of a business as to what really matters. A generic issue here is the way that a board conditions the time
horizon of executive attention and action. At one end of the spectrum, board oversight of immediate financial
performance can merely amplify pressures from investors for immediate returns. At the other end, a board can be
alert to the risk that such short term financial performance can be realised at the expense of future performance,
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Defensive corporate governance is when
there is a dominant preoccupation with
governance processes, such as risk
identification and audits, within a board.
In contrast, a high performing workplace is
one where board directors take a more
balanced approach and work with senior
executives to develop the longer term
strategy for the business and monitor the
firm’s future value creating capacity.
In this study, we examine the extent to
which Boards monitor the non-financial
indicators of the firm.
and seek to ensure that at least part of executive energies are given to the development of capabilities within the
organisation (Koller et al., 2005; Hilman & Dalziel, 2003). Within the conventional governance literature there is
now a recognition that managing the share price is very different from maximising the long term value of a
company (Jensen, 2001; Bebchuk & Fried, 2003).
One of the board‘s primary contributions to creating a high performance business lies in its role in the selection of
a Chief Executive and associated executive team. These are the key decisions upon which much else then
depends. We would expect that a high performing board would pay particular attention not just to the proper
management of immediate succession but also to the more
systematic management of senior executive development
plans (Shen & Cannella, 2003). This ensures that there is
ideally a pool of talent to manage future succession beyond
the incumbent executive, and that potential future senior
executives are being given the appropriate responsibilities
and opportunities to build and develop their skills.
A second key contribution of a board lies in the way that it
works with senior executives in developing the longer term
strategy for the business. Again, one of the unintended
consequences of the defensive focus of corporate
governance can be to effectively limit the board‘s oversight
and involvement in testing and challenging executive
strategy. These effects can be traced to the strong short term
financial pressures placed upon executives by investors, and a rather defensive preoccupation with corporate
governance processes within a board. At least from the perspective of directors a strategic focus to a board‘s
work, and in particular non-executive testing of executive strategy, is what gives substance to the board‘s unitary
designation and adds most value to executives through drawing fully on the skills and experiences of non-
executives in support of executive performance (Stiles & Taylor, 1996).
What empirical evidence there is suggests that a board‘s involvement in the executive strategy process is very
variable. Minimally the board, and non-executives, perform no more than a ritual rubber stamping role in relation
to executive proposals. A more fully developed strategic role for a board can involve focused ?off board? sessions
with the executive team and the careful management of the board agenda to ensure that there is space for the
discussion of strategic issues at every board meeting (McNulty & Pettigrew, 1999). A climate of openness
between executives and non-executives allows the Chief Executive to bring matters to the board for discussion at
an early stage prior to the development of detailed proposals. This guards against executive escalation of
commitment, and gives the board exposure to the thought processes within the executive team, prior to the
submission of definitive proposals to the board for final approval.
It is within the umbrella of such processes that a board can do much to support the executive in creating a high
performance culture. Oversight of technical changes and new product development are obviously key here, but
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these in turn need to be assessed against the less tangible issues of whether the business is developing the
appropriate intellectual capital to support its future development. Some of this is about the design of performance
management and reward systems and the possible use of non-financial performance metrics to focus effort and
reward different aspects of performance (see Section 2.8 on intellectual capital above). Some of this is about
developing and implementing leadership metrics as part of the performance measurement of the senior executive
team (Collins, 2005).
2.9. Information and Communication Technology
2.9.1. Introduction
Despite the considerable investment in ICT by organisations in the 1990s, there was little evidence that this
investment led to increases in national productivity, a phenomenon referred to as the ?IT Productivity Paradox?
(Brynjolfsson, 1993). More recently, evidence is emerging that supports a link between ICT investment and firm
performance (see OECD, 2004). Australia has performed particularly well in ICT investment, with Keane (2008)
reporting that IT investment contributed about one third of the labour productivity growth rate of 3.1 per cent over
the period of1993 to 2000. These improvements arise from multifactor productivity (MFP) growth, in which two or
more of the following are present: the introduction of new technology; improved workforce skills and education
(labour quality); economies of scale; and better management and work practices. Thus, the improvement in firm
performance attributable to ICT investment is associated with complementary investments and changes in human
capital, changes in organisational structure, new work designs, and greater employee engagement (Black &
Lynch, 2002).
Arvanitis and Loukis (2009) summarise the ?New Firm Model? as one in which:
? Organisations replace the mass production model focusing on manufacturing with a flexible, multiproduct
approach emphasising quality and market responsiveness and taking advantage of technological
advances and new organisational forms (Milgrom & Roberts, 1990);
? There is a shift from ?tayloristic? organisation to ?holistic? organisation, characterised by job rotation and
learning across tasks (Lindbeck & Smower, 2000); and.
? Change is skill-based and requires complementary systems of ICT, workplace organisation, and
innovation (Bresnahan et al., 2002).
Arvanitis and Loukis (2009, p. 44) conclude that a ?common characteristic that is central in all these types of
studies is the existence of complementarities among several factors which mutually enhance their impact on firm
performance.? Principal complementarities are ICT, organisational practices, and human capital. However, in a
review of recent studies, Arvanitis and Loukis (2009) note that although most of these studies find a statistically
significant positive effect on performance for ICT and organisational capital (OC), only a few find a similar effect
for human capital (HC) and performance (see Table 1, p. 46). An exception is the Australian study conducted by
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Gretton et al. (2002) which finds ICT, OC, and HC to have a significant impact on business performance and
further finds evidence of complementarities between ICT and OC, and ICT and HC.
2.9.2. Types of ICT in the Workplace
The term ?ICT? was coined to mark the convergence of computing and communications. The Canadian statistics
office
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definition is, ?ICT includes technologies such as desktop and laptop computers, software, peripherals and
connections to the Internet that are intended to fulfil information processing and communications functions.? While
ICT refers to technologies, an information system (IS) comprises people and machines, and represents ?a set of
interrelated components that collect (or retrieve), process, store, and distribute information to support decision
making and control in an organisation? (Laudon & Laudon, 2008, p. ??). We are interested in ICT applications, i.e.
how ICT is used as part of a broader IS in an organisational context to some purpose.
ICT application types
We categorise ICT applications as follows:
? Enterprise – supporting business operations through specifying business processes (tasks and
sequences). These include enterprise systems such as SCM (back office) and CRM (front office), support
systems (e.g., self-service procurement via third party marketplaces and online employee services such
as expense claims), and generic business process management (BPM) technologies;
? Informational – supporting decision making for senior managers (strategise, scan environment, set
policies, allocate resources), middle management (carry out plans of senior management), and
operational management (monitor and control day-to-day operations). This will involve use of information
collected by enterprise systems and data warehousing, data-mining, and decision support technologies;
? Collaborative – facilitating interactions without specifying their parameters, without specifying tasks and
sequences, and use tends to be optional. Examples include email, instant messaging, wikis, blogs, social
networking sites, and mash-ups. These technologies form part of the Web 2.0 phenomenon and are
characterised by user generated content and collaboration giving power to individuals and communities;
and
? Functional – used to support the execution of discrete tasks. They include the use of spreadsheets,
simulators, CAD, and statistical software.
McAfee (2006) identifies four complements that are needed to use IT effectively: (1) better-skilled workers; (2)
higher levels of teamwork; (3) redesigned processes; and (4) new decision rights. Different types of ICT
application require different levels of complement, such that functional IT applications may not require
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http://www.statcan.gc.ca/pub/81-004-x/def/4068723-eng.htm
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complements while enterprise applications do require complements and are likely to involve organisational
change and generate resistance.
Web 2.0 Technologies
Web 2.0 technologies are being used increasingly in the workplace, particularly blogs, wikis, and social
networking sites (SNSs) (McKinsey, 2008). In a survey of nearly 2000 companies, McKinsey (2008) find that the
primary use of Web 2.0 is for managing knowledge and collaboration (internal applications), improving customer
service and acquiring new customers (interfacing with customers), and achieving better integration and tapping
into expert knowledge (interfacing with partners/suppliers). They identified the most significant barriers to Web 2.0
adoption in enterprises as: lack of understanding of potential financial return; a culture that does not encourage
the use of Web 2.0 technologies; and insufficient incentives to adopt or experiment with Web 2.0 technologies.
2.9.3. ICT Benefits
The benefits of ICT for a firm include (Arvanitis & Loukis, 2009):
? savings on inputs and general cost reductions
? greater flexibility and improvements in product quality
? savings on labour or on some specific labour skills
? reduction in capital needs through, for example, increased utilisation of equipment and reduction in
inventories or space requirements
? higher product quality
? better product development conditions
? increased flexibility of the production process
? allowing for the exploitation of economies of scale
? improved networking and communication between employees (reduced cost of lateral communication and
reduced coordination costs)
? improved monitoring, which can reduce the number of supervisors required in the production process
There are less tangible benefits from IT, such as:
? Internal/Management
o Employee morale, product development, organisational flexibility
o Improved planning, more timely information, improved decision-making
o Organisational learning/knowledge management
? External/Strategic
o New products and new channels to market
o Customer service, enterprise image, market development
o Create competitive advantage, build barriers to entry, enhance differentiation
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The survey will ask employees about their
perceived usefulness of the firm’s ICT and
infusion of ICT.
Perceived usefulness is the degree to
which a person believes that using ICT
enhances his or her job performance.
Infusion is how well an individual uses ICT
to enhance his/her productivity and gives
an idea of the extent to which the
potential of ICT to enhance work has been
exploited.
We hypothesise that high levels of ICT
perceived usefulness and infusion will be
positively associated with higher levels of
firm performance.
With respect to external/strategic use of ICT, Bergeron et al. (2001, 2004) developed a scale for assessing the
strategic use of IT. Their survey was conducted with SMEs and with the CEO as respondent, and these items
capture the potential benefits of ICT well.
Securing Benefits from ICT
There are numerous reasons why firms fail to get value from their ICT investments. We summarise these into
three areas: lack of attention to complementarities, poor fit of ICT and work practices, and poor governance. A
fourth factor needs to be considered: whether ICT is being used in an ethical way.
Complementarities: as noted above, achievement of these benefits does not arise from a simple technology
investment. It will likely require complementary investments in organisational capital and human capital, and
changes to organisational form and work design, particularly to secure the strategic benefits (e.g., the creation of
competitive advantage).
Work design: even when it is possible to railroad the ICT
into the organisation it may not be productive, despite
seeming a perfectly rational thing to do. This
problematical theme has been investigated by Sachs
(1995), who describes a case study of a Trouble Ticketing
System (a database for recording and scheduling jobs), in
which new technology and new working practices are
introduced. On the face of it, the new technology and
redesigned work processes should have led to gains in
efficiency. Unfortunately, in actuality, the opposite
happened – work became less efficient. The systems
analyst had failed to understand how the experienced
maintenance engineers shared their knowledge through
informal mentoring schemes, how knowledge was shared
through social interaction (the ?coffee machine? effect), and
how the new data entry requirements would slow productivity (Vidgen et al., 2002).
Governance: IT governance is the top management concern of controlling IT‘s strategic impact and its delivery of
value to the business, to manage oversight of cost and time, and to ensure that IT plans change as circumstances
change (Weill & Ross, 2004). Organisations with appropriate governance structures, such as an IT steering
committee, perform better than those that don‘t (Weill, 2004).
Ethical use of ICT: even if the complementarities and fit with work practices are addressed there remains the
question of whether the use of ICT is fair and ethical. Greenbaum (1995, p. ??), in ?Windows on the Workplace?
reports on call centres,
There‘s AHU, that‘s After Hang Up time. It‘s supposed to be fourteen seconds. It just came down to
thirteen. But my average is five seconds AHU, because I do most of the work while the customer‘s still on
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the phone. There‘s your talk time, your availability, your occupancy - that‘s the percent of time you‘re
plugged in, which is supposed to be 98 percent.
Although intensification of work through the use of ICT is not necessarily a ?bad? thing (indeed, it may lead to
more fulfilling work for the individual and increased productivity for the firm), there is a potential for ICT to erode
worker autonomy. For example, the UK‘s Guardian newspaper‘s (28 January 2006) investigation into call centres
reported,
At scrupulous companies such as Converso, the cold callers have control over their auto-diallers. They can
press a pause button whenever they like and stretch their legs or whatever. But at crueller companies the
auto-dialler is like a runaway train: there is no pause button, no respite, one must cling on or die. … After
six months of the auto-dialler you just want to shoot yourself in the head.
The inappropriate intensification of work through the use of ICT will likely contribute to workplace stress and have
a negative impact on employee quality of life.
2.9.4. Levels of ICT Investment
A simple measure of the IT input for a firm is the IT expenditure per employee (Byrd et al. 2006). As to what
constitutes expenditure, Huang et al. (2006) define IT Investment as the sum of hardware expenses, software
expenses, maintenance expenses, training expenses, and personnel expenses. Dibrell et al. (2007) used a four-
item scale that asked respondents to report their (1) total dollar value of IT assets; (2) total IT investment; (3)
number of IT employees; and (4) number of personal computers and terminals per employee.
Youndt et al. (2004) provide a more sophisticated view of the ICT investment, looking at measures such as the
percentage of employees with desktop computing and the percentage with access to the Internet.
2.9.5. Strategic Alignment
The Society for Information Management (SIM) commissions a survey on a regular basis to discover the key
management concerns of Chief Information Officers (CIO). The alignment of IT and business has been a
consistent high scoring item and was ranked number 1 in 2003, 2004, 2005, and 2006, and was the second most
important issue in 2007 (Luftman et al., 2006; Luftman & Kempaiah, 2008).
Chan (2002, p.??) defines strategic alignment as ?the fit between the priorities and activities of the IS function and
the business unit? and say that the goal in strategic alignment is for ?IS priorities, capabilities, decisions, and
actions to support those of the entire business.? When Campbell (2005) asked the participants of a focus group to
define alignment, the deceptively simple response was ?Alignment is the business and IT working together to
reach a common goal.? The term ?fit? is also used extensively, from Henderson and Venkatraman (1993) on.
Shams and Wheelers‘ (2003, p. 66) definition captures the intertwinedness of business and IT of alignment as,
?convergent intentions, shared understanding, and coordinated procedures?. Chan and Reich (2007a, 2007b)
provide an extensive overview of the research into alignment.
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Byrd et al. (2006) find evidence for strategic alignment as a moderating affect on the relationship between IT
investment and firm performance.
2.9.6. User Satisfaction and ICT
There is a substantial body of literature on user satisfaction with IT and user acceptance of IT, notably Davis‘
(1989) technology acceptance model (TAM), which is grounded in the theory of planned behaviour and more
latterly the theory of planned action. The IS success model developed by DeLone and McLean (1993) identify
multiple dimensions of IS success - information quality, system quality, and service quality – and their impact on
user satisfaction.
A fundamental aspect of the TAM is that people use IT because it is perceived to be useful in their job or role. The
UTAUT (Venkatesh et al., 2003) attempted to unify the various TAM variants and identifies further factors that
affect IT adoption, including social influence (do others in the organisation encourage the use of the technology)
and facilitating conditions (does the user have the resources and knowledge to deploy the technology).
ICT infusion
Sundaram et al. (2007) identify three constructs relevant to individual perceptions of ICT:
? Frequency: how frequently an employee uses ICT
o i.e., how often an employee uses ICT
? Infusion: the extent to which the full potential of ICT is embedded in an organisations managerial and
work systems
o i.e., how well an employee uses ICT
? Routinisation: the extent to which ICT has been integrated into the employee‘s normal work routine
o i.e., how efficiently an employee uses ICT
Whereas the TAM is concerned with future intentions to use technology, the infusion model is concerned with how
well the technology is working for the user. In the context of high performing workplaces an indication of the extent
of ICT use by employees and whether that ICT is helpful in performing work should be particularly relevant.
2.9.4. Virtual Workplaces
Crandall and Wallace (1998, p. 19) define the virtual workplace as, ?where work is done anytime and anywhere,
and not bound by the traditional limitations of time, physical space, job descriptions, title, and pyramidal reporting
relationships?. Akkirman and Harris (2005) take this as providing the flexibility to work at any time and in any place
through information and communication technologies. The virtual workplace includes telecenters, teleworking,
hot-desking, hotelling, and virtual offices, For many, the virtual workplace is an increasingly preferred and
ubiquitous workplace (Akirrman & Harris, 2005). Effective communication is essential to organisations – poor
communication correlates with lower commitment, reduced productivity, increased absenteeism, and higher
turnover (Hargie et al., 2002). Staples (2001) finds that employees in a virtual workplace had lower levels of job
satisfaction and trust that could be attributed to poor communication.
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Akkirman and Harris (2005) compared virtual and traditional office workers in terms of personal feedback,
communication climate, relationship with supervisors, horizontal and informal communication, and organisational
integration, and overall communication satisfaction. Counter to expectation, the results showed that virtual
workers had higher levels of communication satisfaction than traditional workers.
2.9.5. Conclusion and Recommendations
The survey will ask employees about their perceived usefulness of the firm‘s ICT and ICT infusion. Perceived
usefulness is the degree to which a person believes that using ICT enhances his or her job performance. This
construct is applicable to all employees, regardless of the type of ICT they use and their role or level in the
organisation. We hypothesise that high levels of perceived usefulness of ICT will be positively associated with
higher levels of firm performance. The construct will also give an idea of how well the ICT fits with the actual work
practices of employees. ICT infusion gives an idea of the extent to which the potential of ICT to enhance work has
been exploited, i.e., how well the employee uses ICT. We hypothesise that high levels of using ICT well will be
positively associated with higher levels of firm performance.
The CFO survey will ask about levels of financial ICT investment (annual ICT budget) and request further details
of non-financial investment indicators, like the percentage of employees with desktop computing devices, and the
number of people in the IT department. The CFO will also be asked to assess the extent and quality of the firm‘s
ICT provision and to assess the types of technology used, and their relative importance to the firm (such as
communication software, enterprise systems). From a strategic perspective the CFO will be asked how ICT is
used in the firm (e.g., to save cost, to improve product quality) and how ICT strategy and business strategy align.
We hypothesise that a higher level of ICT investment, aligned with business strategy, will be positively associated
with a higher level of firm performance.
Although the bulk of the ICT questions are directed toward the CFO, the HR Manager will be asked what
percentage of employees are virtual workers. High levels of virtual working will require higher levels of ICT
investment and ICT effectiveness.
2.10. Factors that Can Moderate Firm Performance
There are a number of factors that can moderate the type and/or effectiveness of high performing workplace
practices. Workplace practices can, for example, vary depending on industry size, maturity of the market, industry
sector, ownership structure, firm strategy etc.
Furthermore, the industry sector can affect the effectiveness of different workplace practices. A report funded by
the Department of Trade and Industry in the United Kingdom examined the results of ten case studies of high
performance work practices and found evidence that some of the ?bundles? of high performance practices work
better than others in generating specific outcomes (Sung & Ashton, 2004). In addition, different ?bundles? of
practices are more or less appropriate to different sectors to achieve business outcomes. For example,
companies in the financial services sector experienced superior results using financial incentives, whereas in
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Firm performance is moderated by
firm demographics. In this study, we
consider the moderating effects of
things such as:
• Industry / Age / Size
• Locations / Ownership
structure / Foreign ownership
• Competitors / Exports
(globalisation) / Imports
• Industry dynamics /
Uncertainty / Use of sub-
contractors.
manufacturing and business services success was reported through high involvement practices such as
decentralisation of decision making and the use of teams (Sung & Ashton, 2004).
In the service sector, high performing workplace practices can be expected to vary enormously because service
industries, and competitive segments within them, cover a huge
range of business models (Boxall & Macky, 2009). At one
extreme, prices are kept low through low-skilled work and
through labour-saving technology (such as self serve
checkouts at large grocery outlets like Big W) while, at the
other extreme (professional services), firms largely compete
through complex knowledge which is customised to specific
client needs and circumstances (Boxall & Macky, 2009). What
this means is that the specific sector within the service industry,
and indeed the particular job, are important variables to be
considered in determining which practices, or bundles of
practices, produce high performing workplaces. For example, in
professional services, tasks rely on discretionary judgement
and team meetings that pool expert knowledge. Bundles of
practices that support knowledge acquisition, autonomy and teams are likely to produce strong effects.
Additional complexity is that there are firms in the service sector that provide mass and customised service that
require different business strategies. Cogin and Williamson (2010) argue that organisations adopting a particular
business strategy require HRM practices that are different from those required by firms espousing alternative
strategies. Cogin and Williamson (2010) provide compelling evidence that organisations that have greater
alignment between their HRM practices and their strategy will enjoy superior performance.
For illustrative purposes, in the following section, we provide an example of the complex relationships between
different types of business strategy and HRM practices. Referring to Porter's strategy types, Schuler and Jackson
(1987) classify business strategies into three types and designate different types of employee behaviour and HRM
methods for each competitive strategy, as follows:
? A cost reduction strategy involves enhancing competitiveness by lowering the prices of products or
services. This method enhances production efficiency and reduces expenditures by adopting new
technology, enlarging the scale of production, or re-engineering production processes, so that a business
can sell its products or services at a lower price in the market. Businesses that prefer a cost-reduction
strategy must rigorously control and minimise expenses and strive for greater economies of scale.
According to Dowling and Schuler (1990), the most appropriate HRM strategy in this context would include
recruitment of employees from the external labour market. The selection of employees should focus on their
ability to begin work immediately and minimisation of training expense. The job content of such workers is
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definite, career development focuses on specialisation, performance evaluation emphasises the short-term
and the individual, pay is based on external equity with other workers, and bonuses and other monetary
incentives are rare. Because worker recruitment emphasises technological ability and organisational
requirements, job security is poor (Dowling & Schuler, 1990).
? Innovation strategy emphasises the development of products or services that are unique or different from
those of competitors. Businesses adopting an innovation strategy must be prepared to adapt to rapid market
change and technological progress. Employees need to be creative; to be cooperative with each other; able
to pursue long-term objectives; devote proper consideration to the quality and quantity of products and
services provided; and be able to take risks and cope successfully with ambiguity and uncertainty.
According to Schuler (1988), the HRM strategy needs to develop employees with these qualities; job
descriptions should be broad, employee interaction strongly encouraged, career options should be
extensive, training and career development emphasised, pay scales based on internal equity, there should
be excellent job security, and performance evaluations need to stress team work and a long-term orientation
(Dowling & Schuler, 1990).
? Quality enhancement strategy achieves success by offering a standard of quality superior to that of other
products or services. Those businesses adopting a quality-enhancement strategy must make frequent
changes in the production process in order to continuously upgrade product quality. This type of strategy
requires a culture of employee involvement and organisational flexibility. Employees are required to engage
in predictive and repetitive behaviour, to cooperate closely with others and make a strong commitment to
organisational goals (Dowling & Schuler, 1990).
As can be seen, HRM needs to be aligned to influence employee attitude and behaviour in a way that helps a
business achieve its competitive strategy. For example, a firm implementing practices that encourage employee
behaviour consistent with its business strategy will achieve superior performance (Cogin & Williamson, 2010;
Delery & Doty, 1996). Chang and Huang (2005) tested Pfeffer‘s (1999) universal HRM practices in Taiwanese
firms and found no support for a one-size-fits-all approach, but that an innovative product market strategy did
moderate the relationship between HRM practices and organisational performance. The concept of ?fit? refers to
the coordination and alignment of high performing workplace practices and business strategies in ways that will
assist lift performance.
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3. Barriers to High Performing Workplace Practices
Attempts have previously been made to implement high performing workplace practices into workplaces around
the world. In the United States, the America’s Choice Report (1990) and the New America Workplace (1994) both
put forward suggestions on how to lift workplace performance. In Australia, the Karpin Report (1995), the
Australian Workplace Industrial Relations Survey (1990, 1995), and the Best Practice Demonstration Program
(Rimmer et al., 1997) similarly made various recommendations. Several reasons have been suggested as to why
such recommendations were not successful. In Australia, a loss of commitment due to a change of Government
may have played a role.
In this section, we identify some of the possible barriers to ?higher performance?, drawing on research from,
among others, the United Kingdom report Engaging for Success: Enhancing Performance through Employee
Engagement (MacLeod & Clarke, 2009).
Based on a brief review of secondary literatures, we find four key problems or barriers: a Knowledge Problem; an
Implementation Problem; an Unwillingness by Managers to Relinquish Control; and an Accountability Problem.
3.1. A Knowledge Problem
According to MacLeod and Clarke (2009), some leaders are not aware of the issue of employee engagement
while others do not believe it to be worthwhile. Meanwhile, some managers and leaders are not fully aware of
or do not fully understand, the concept or what benefits it might bring to their organisations. In the course of
their study, while talking to business leaders, MacLeod and Clarke (2009) found widespread ignorance of the
concept of employee engagement or the potential benefits it could bring to their firms. This finding is supported
by a recent report from Accor who claim that 75 percent of leaders have no engagement plan or strategy
despite 90 percent agreeing that engagement does impact on the chances of business success. This lack of
comprehension at the most senior level is echoed by Accenture‘s finding that over half of Chief Financial
Offers it surveyed had a minimal understanding of the return on their investments in human capital. In addition,
a further 30 per cent understood it to a modest level and only 16 per cent demonstrated a considerable
understanding.
One recommendation from the Macleod and Clarke report is for a nationwide effort to raise the profile of the
issue and to increase the availability of practical support.
3.2. An Implementation Problem
A second barrier identified by MacLeod and Clarke (2009) suggests that even if some employers are interested in
what employee engagement could offer, they often do not know how to address or action the subject within their
organisations:
Uncertainty over engagement is also reflected in a fear that engagement might be seen as too ?soft and
fluffy? or as ?not the British way?. As the law firm Freshfields Bruckhaus Deringer told us, when they
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introduced their groundbreaking engagement strategy for legal associates, ?we could have come at it
from a fluffy approach, but it wouldn’t have worked. So we put the performance metrics up front (MacLeod
and Clarke, 2009, p. 67).
Spreitzer and Quinn (2001) point out another impediment; the search for short term results by business. This is
set against the fact that creating a high performing workplace is a cumbersome, challenging and ambiguous
process that takes time and cannot be done in a six months period by following a five-step plan. The long-term
approach necessary for successful empowerment implementation efforts appears at odds with a business
environment that requires quarterly results. This long-term approach is especially difficult as leadership transitions
bring frequent changes to the vision for the organisation. ?Quick fixes? advocated by ?management gurus? in
simple to understand five step programs might be popular, but cannot be realistically expected to succeed in
modern organisations replete with complexity, ambiguity, messiness and the rapid rate of change that is common
today (Spreitzer & Quinn, 2001).
3.3. An Unwillingness to Relinquish Control
Relinquishing control and letting go of the Taylorist work model that we have been brought up to believe in
represents a third key barrier. Once again, Spreitzer and Quinn (2001) make important observations, this time
regarding the unwillingness of managers to trust in the idea of surrendering some of their power. This
unwillingness is partially due to concerns that relinquishing control increases the number of unknowns and hence
the potential for failure. At the heart of this concern resides scepticism as to subordinates‘ capacity to handle
?managerial? responsibilities and whether newly empowered subordinates will have the necessary levels of
organisational commitment. There is also some fear about who will carry responsibility for any errors that might
appear after this ?empowerment?.
The Accor report (2008, p. 19), although not an academic text, does make an interesting point in that it explains
that ?the issue seems to lie in their (manager‘s) unwillingness to talk the talk and truly relinquish command and
control styles of leadership in favour of a relationship based on mutuality.? A similar situation was found in a study
by Hales (2005) of first line managers, which found that supervisory duties remained much in evidence and that
devolution of responsibility to teams was rare.
Interestingly, even if middle managers become convinced of the need for change they can still run up against
barriers in the shape of the most senior managers. A study by Alimo-Metcalfe et al. (2008) found that after
managers had been trained with a clearer idea of what leadership looked like, their suggestions for improvement
were rejected or ignored by their somewhat defensive and/or reactionary bosses.
Conditioning and the history of the workplace also play a significant role in creating the cultural norms we find in
firms. As such, barriers to large scale change need to address issues about the human psyche and condition of
self and ego.
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3.4. Accountability and Measuring Value Creation
Finally, an obsession with targets can ?infect? managers‘ behaviours and detract from their ability to interact
effectively with their staff. John Oliver (2009), the former Managing Director of Leyland Trucks, explains (in
MacLeod & Clarke, 2009, p. 69),
Ninety-nine per cent of failure to engage staff is down to management behaviour. The management
paradigm which introduced management by objectives and KPIs [key performance indicators] changed
the whole way of thinking around good and bad management. Managers often focus on what they are
judged on i.e. KPIs. They give the impression on the shop floor that they are much more concerned with
outputs than people. There is less humanity and more mechanistic behaviour despite superficial
friendliness and a ?call me Dave‘ type lack of formality with staff; I call this kind of manager the ?friendly
automaton…
Philip Whitely of the Human Capital Forum is reported as saying that what is required is ?a Copernican shift,
ditching the centuries old dominance of accountancy as the way of understanding the organisation.?(cited in
MacLeod & Clarke, 2009, p.67).
While these various statements may be somewhat sceptical, it is true to say that more can be done to ensure that
accounting better reflects, profiles and permits visualisation of the process of value creation in order to lift
workplace performance. This does not suggest that KPIs are a bad thing, merely that pursuit of targets without
consideration of the way that they are achieved and what they stand for heavily impact upon employees and
managers alike, and can result in the wrong behaviour. The Global Financial Crisis has been one example of
obsessions with financial returns having severe implications worldwide.
This also raises a range of interesting questions: What do we encourage students in the class room and
managers at work to believe in? Do workplace practices and our current management education curricula focus
too much on managing by objectives and short term financial outputs? Do we place sufficient emphasis on
building sustainable organisations that ensure long term value creation and maximises the potential and
contributions of all employees?
The research that forms part of this project (specifically the forthcoming phase in 2010 that pilots intervention
strategies to lift workplace performance) will examine in more detail the barriers to the uptake of high performing
workplace practices in Australia.
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4. Background to the Development of the Surveys
This section provides background information to the development of the surveys. It reviews some of the largest
and most influential workplace and management surveys done in Australia and internationally; comments on
research design; and discusses the suggested research methods.
4.1. Review of Existing Workplace and Management Surveys
A number of workplace and management surveys have been conducted internationally by national governments
and others in recent years. Many of these have investigated the relationships between management practices,
innovation and productivity growth. The aim of this section of the report is to review some of the most
comprehensive and relevant workplace and management surveys.
Table 8 overleaf provides a comparative summary of the surveys being reviewed. It details the:
? General Survey Information: States the country, survey name and sponsoring organisation.
? Research Aims: States the aims of the research.
? Theoretical Basis: Identifies the theory that has informed the survey.
? Research Instrument: Discusses the research instrument, including the measurements used.
? Research Method: Discusses how the data was collected and analysed.
? Major Findings: Summarises the key research findings.
Four observations can be made about the surveys reviewed, as follows:
1. Descriptive versus Analytical
The surveys split into two categories: descriptive and analytical. The purely descriptive surveys include
surveys such as the 1995 Australian Workplace Industrial Relations Survey (AWIRS), the UK Workplace
Employment Relations Surveys (WERS), and the United States Federal Human Capital Survey. These
surveys provide descriptive information that in subsequent studies has been used longitudinally or
combined with statistics from other sources to demonstrate relationships and further explore the impacts
of certain management practices on, for example, economic performance. Their primary purpose,
however, has been to facilitate observations about the status of and changes in workplace relations over
the past two decades.
More recent workplace surveys tend to be more analytical in nature and focus principally on the
relationship between productivity and management practices employed in firms, industries or nations.
These analytical surveys are beneficial because they help identify those workplace practices that result in
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higher levels of innovation and productivity, and these can be used to improve policy and practices inside
firms.
2. High Performing Workplace Practices; Opportunities to Broaden Insights and Understandings
High performing workplace practices are diverse and originate from different disciplinary areas ranging
from general management, human resources managements and organisational behaviour to performance
measurement and industrial relations. Some of the more common areas of research inquiry in the
surveys reviewed here include:
? Performance measurement and evaluation of people and business processes (e.g. Black & Lynch,
2004; Flood et al., 2007; Bloom et al., 2007; Green et al., 2009);
? Recruitment, promotion and compensation practices, structured around, for example, merit and
incentives (e.g. Black & Lynch, 2004; Flood et al., 2007; Bloom et al., 2007; Green et al., 2009);
? Workforce diversity and equal opportunity employment (e.g. Flood et al., 2007);
? Organisational design, including job-rotation, employee participation and organisation of workers in
teams (e.g. Arundel et al., 2007; Flood et al., 2007; Black & Lynch, 2004);
? Communication and access to strategic information (Flood et al., 2007);
? Learning, training and development, including multi-skilling (e.g. Arundel et al., 2007; Flood et al.,
2007; Black & Lynch, 2004).
Relationships that have been less thoroughly explored include the relationship between leadership and
high performance; governance (including board monitoring) and high performance; and management
controls and high performance (including innovation). In this study, we intend to broaden the analysis to
include a greater focus on leadership, culture, governance, and management controls. This will widen the
analysis of what drives firm performance beyond the more traditional areas (such as organisational
design, industrial relations, and training and learning). Doing so will shed new light on the multiple
linkages between management practices and performance for the benefits of practitioners and policy
makers alike.
3. Consistency in Findings: Management Practices are a Key Determinant of Productivity and
Innovation
The surveys reviewed consistently show a positive relationship between management practices and
productivity. This is consistent for studies that cover large number of firms of varying sizes and in various
industries across seventeen countries (in Europe/ UK/ Asia/ North America (Bloom et al., 2007), in Ireland
(Flood et al., 2008), in the United States (Black & Lynch, 2004), and in Australia (Green et al., 2009).
Arundel et al. (2007) focus specifically on innovation and find that certain management practices can lift
124
innovation levels. Specifically, when work is organised to support high levels of employee discretion in
solving complex problems, firms tend to be more active in innovation.
4. Limited Insights into Management Practices and Productivity in Australia
Last, Table 8 shows that significant progress has been made internationally at researching and
?unpacking? the relation between workplace practices and productivity. Yet, in Australia, the last national
survey of workplace and management practices was done in 1995 (see the Australian Workplace
Industrial Relations Survey, Morehead et al., 1997). Aside from the work of Green et al. (2009), Australian
efforts have languished, and little has been done on a national or cross-sectoral scale since 1995.
Bloom et al. (2007, p.10) explain that it can be in a nation‘s interest to refocus its policy efforts on the
opportunities to grow workplace productivity by improving management practices,
Governments can play their part in encouraging the take-up of good management behaviour.
Doing so may be the single most cost-effective way of improving the performance of their
economies. Strong competition and flexible labour markets both lead directly to improved
management performance. Multinational companies have a strong positive effect and their
influence is felt throughout the regions in which they operate. Relentless improvement in
educational standards is also essential. Better-managed firms need more highly skilled
workers and they make better use of them, while better managers will be a key component of
the performance transformation that both established and emerging economies must
undertake if they are to maintain and improve their global competitive position.
125
Table 8: Review of Workplace Surveys
Survey Research Aim
Robustness
Major Findings
Theoretical Basis Research Instrument Research Method
Ireland
High Performing Work
Systems in Ireland
National Centre for
Partnership and
Performance
Flood, et al., 2008
Investigates the
relationship
between a suite of
management
practices, and
innovation and
productivity.
The management
practices were
grouped under the
headings of:
? Strategic HR
management
? Partnership
between firms
and workers
? Diversity and
equality, and
? Flexible working
conditions.
The unit of analysis
was ?the firm?.
The methodology
draws on previous
research by the
National Centre for
Partnership and
Performance,
including Flood et
al. (2005).
Measures include a
mix of self-reported
facts and perceptions
by General Managers
and HR Managers,
along with performance
variables describing
labour productivity,
workforce innovation
and employee
turnover.
Sample drawn from
?The Irish Times Top
1000 Companies?
database (1005
contacted).
Two survey
instruments were
issued: directed
respectively at the HR
Manager and the
General Manager.
N = 132 (respondents
that completed both
the General Manager
and HR Manager
surveys).
Descriptive statistics
and four regression
models used in
reporting.
Companies adopting high
performing workplace
systems showed a:
? 14.8 per cent increase
in labour productivity
(equivalent to over
€44,000 per employee
or €12 million per
median company of 270
employees)
? 12.2 per cent
improvement in
workplace innovation
(equivalent to over
€2,000 per employee or
over €500,000 per
median company)
? 7.7 per cent reduction
in employee turnover
(equivalent to retaining
2 additional employees
per median company)
International study
in 16 countries in
Europe, North
America and Asia.
Management Practice
and Productivity: Why
They Matter?
London School of
Economics (LSE)/
McKinsey & Co.
Investigates the
relationship
between
management
practices and
workplace
productivity.
The management
practices were
grouped under the
headings of:
? Operations
Relies on a
methodology
created by LSE in
2004 and used with
over 4,000
respondent firms to
date.
Measures involved
score perceptions of 18
dimensions of
management practice
across the three
categories. Scores
were based on a set of
pre-determined criteria
grading practices in
each dimension from
best to worst.
Quantitative
performance data was
Validity established
with extensive
database of historical
results, including
similar correlations
calculated in 4,000
firms, in 16 countries.
Method based on
structured
conversational
interviews with senior
managers.
?A single point increase in
management practice
score is associated with the
same increase in output as
a 25 per cent increase in
the labour force or a 65 per
cent increase in invested
capital? (p.5)
126
Bloom, et al., 2007 ? Performance
? People
The unit of analysis
was ?the firm?.
also collected and
used in analysis.
Descriptive statistics
and correlation
analysis.
Australia
Management Matters
in Australia: Just How
Productivity Are We?
Department of
Innovation, Industry,
Science and
Research.
Green, et al., 2009
Investigates the
relationship
between
management
practices and
workplace
productivity.
Benchmarking
Australia against
15 other countries.
The management
practices were
grouped under the
headings of:
? Operations
? Performance
? People
The unit of analysis
was ?the firm?.
As the Australian
limb of the above
LSE/McKinsey
study, replicates its
methodology.
Validity established in
similar surveys of
4,000 respondents in
Europe, North
America and Asia and
inferred for Australia.
Extensive database of
historical results.
Method based on
structured
conversational
interviews with senior
managers.
N= 439 medium and
large-sized
manufacturing firms
(50 to 5,000
employees).
Descriptive statistics
and correlation
analysis.
?The relative level of firm
output associated with an
increase of a single point in
the management score is
equivalent to a 56 per cent
increase in the labour force
or a 44 per cent increase in
invested capital? (p.13).
The worst category of
management practice for
Australian firms was
?People Management? *,
especially the management
of performance and talent.
This area presents the
greatest opportunity for
improvement, when
compared to the 15 other
countries.
* ?People Management?
covers instilling a talent
mindset, addressing poor
performance, attracting,
retaining, rewarding and
promoting high performers.
United States
What’s Driving the
New Economy? The
Benefits of Workplace
Innovation
Black and Lynch,
2004.
To identify the
component of US
productivity growth
(1994 to 1997) that
is attributable to
management
practices.
The unit of analysis
Together with
Black and Lynch
(2001) is informed
by an extensive
literature review.
Applies
sophisticated
econometric
Secondary analysis of
data collected in two
rounds (1993 & 1996)
of the Educational
Quality of the
Workforce (EQW)
National Employers
Survey, administered
by the US Bureau of
The study used panel
data which is a subset
(N=766) of two
surveys conducted in
1993 (N=3000) and
1996 (N=2479) by the
Bureau of the
Census, with site or
plant managers as
Up to one-third of US output
growth in the period 1993 to
1996 stemmed from
productivity enhancing
innovations at the
workplace level, such as re-
engineering of processes,
job-rotation and organising
workers in teams.
127
was the workplace. analysis to US
Bureau of Labour
Statistics data.
the Census.
Survey responses
captured quantitative
financial and
production data as well
as details of
management practices
such as recruitment
and utilisation of
education and training
investments.
the target
respondents.
The sampling frame
comprehensively
covered all firms with
>20 employees, as
maintained by the
Bureau and captured
establishments that
employ >75 per cent
of US workers.
Surveys response
rates were 75 per
cent and 74 per cent
respectively.
Descriptive statistics
and econometric
analysis.
United States
Federal Human
Capital Survey, 2006
Combined with two
previous surveys,
is a longitudinal
study of HR
management
effectiveness in
US government
agencies,
focusing on four
areas including:
Leadership and
Knowledge
Management
(indicates the extent
to which employees
hold their leadership
in high regard, both
overall and on
specific facets of
leadership).
This is not evident
from related
publications.
The survey instrument
is designed to collect
the self-reported
perceptions of
employees of
government agencies.
No other data is
collected, nor are
relationships between
the data and other
measures analysed.
Sampling frame is all
full-time employees of
all US government
agencies.
436,000 employees
were randomly
selected and sent the
electronic survey
instrument.
220,000 responses
were received.
The survey was
conducted via an
online survey with a
six stage Likert scale
(including ?Do not
know? alternative) to
collect responses.
Analysis focuses on
descriptive statistics
only.
The responses have been
tabulated and compared
with similar responses in
prior surveys in a
longitudinal commentary.
The reported highlights
include that over three
quarters of respondents
believe their work is
important, have the
knowledge and skills to get
the job done, know how
their work relates to the
agencies‘ goals and
priorities, gain a sense of
accomplishment from their
work, but do not believe that
there is a link between
performance and pay rises.
128
Results-Oriented
Performance
Culture (indicates
the extent to which
employees believe
their organisational
culture promotes
improvement in
processes, products
and services, and
organisational
outcomes).
Talent
Management
(indicates the extent
to which employees
think the
organisation has the
talent necessary to
achieve its
organisational
goals).
Job Satisfaction
(indicates the extent
to which employees
are satisfied with
their jobs).
The unit of
analysis is the
employee.
Europe
How Europe’s
economies learn: a
comparison of work
organisation and
innovation mode for
the EU-15
Arundel et al., 2007
Investigates the
link between the
organisation of
work and
innovation,
explored through
national data
pertaining to each
of the EU-15
countries.
Informed by
literature reviews of
?high performance
work system?
focused on the
relationship
between
organisation of
work and
innovation.
Secondary analysis of
data collected in two
surveys: the Third
European Survey of
Working Conditions
(ESWC) in 2000
(based on self-reported
perceptions during
face-to face interviews
in respondents‘ homes)
and the third
Sample size = 8,081
salaried employees in
firms of over 10
employees (a subset
of the respondents to
the ESWC survey).
Used 15 binary
variables for work
organisation and
tasks to classify
employing firms within
The study found that
innovation rates are highest
in the Learning
Organisation, which
facilitates interaction
between people with
diverse skills and
competencies and which
has high levels of learning
and employee discretion in
problem solving.
129
The unit of analysis
was the firm.
Community Innovation
Survey (CIS-3) for
innovation activities of
respondent firms
between 1998 and
2000 (based on self-
reported facts and
perceptions)
a 4 part taxonomy of :
- Discretionary
Learning
- Lean Production
- Taylorism; and
- Traditional
Organisation.
Also developed a 3
part taxonomy of
innovation mode to
classify CIS-3
respondents as:
- Lead innovators
- Technology
modifiers
- Technology
adapters
Analysis focussed on
cross-matching of
results within each
EU-15 country.
?…in nations where work is
organized to support high
levels of discretion in
solving complex problems,
firms tend to be more active
in terms of innovations
developed through their
own in-house creative
efforts.? (p.1202)
?...learning and interaction
within organisations and at
workplaces are at least as
important for innovation
performance as learning
through interaction with
external agents.? (p. 1202)
Australia
The 1995 Australian
Workplace Industrial
Relations Survey
(AWIRS) (first run in
1990)
Morehead et al., 1997
To provide
comprehensive
and statistically
reliable nationwide
data on workplace
relations as well as
complementing the
similar 1990
survey, facilitating
analysis of change.
Unit of analysis
was the workplace.
Greatly informed
by UK precedents
– WERS 1980,
1984 and 1990.
Method based on 1990
survey, collecting self-
reported perceptions
and facts via structured
questionnaires (where
respondents pick an
answer from a list).
Four survey
instruments:
- Main (focussed on
activities, structure and
processes used in
workplaces)
- Employee (focussed
on attributes of
employees and their
workplace
Main survey:
N =2001 workplaces
with >20 employees.
Sample frame =
Australian Bureau of
Statistics register of
all establishments in
Australia. Data
collection based on
face-to-face
interviews with
General Manager,
manager responsible
for employee relations
and union delegate.
Employee survey:
N = 19,155.
Sample frame = those
employed at the
Noted a higher incidence of
managers using structures
and formal procedures to
manage employees than in
1990.
Unions lost influence at the
workplace level both
through a declining
presence and, where
present, a declining level of
activity overall.
Union Delegates, where
present, were increasingly
likely to be involved in key
issues (such as negotiating
wage increases).
Despite considerable
130
experiences)
- Small business (focus
similar to Main Survey)
- Panel (focussed on
gleaning detail of
changes between 1990
and 1995 Main
Surveys)
2,001 workplaces
used for the Main
Survey. Data
collection based on
self-completion
questionnaire.
Panel Survey:
N = 698
Sample frame = those
workplaces that
responded to 1990
Main Survey. Data
collection based on
face-to-face
interviews.
change to the context of
industrial relations during
the first half of the 1990s
(e.g. decentralisation of
wages system, enterprise
bargaining, declining union
membership), there were no
radically different outcomes
in terms of workplace
industrial relations.
United Kingdom
Workplace
Employment
Relations Survey
(WERS) (2004)
Precedents of WERS
2004 were run in
1980, 1984 and 1990.
Department of Trade
and Industry (and
others, see Kersley et
al., 2006)
To map workplace
relations over time
(fifth survey in the
series which
started in 1980), in
order to inform
policy development
and provide a
statistically reliable
set of data to
inform research,
debate and
practice.
Unit of analysis
was the workplace.
Primary aim to
maintain
consistency in
design and scope
with previous
surveys, to assist
longitudinal study.
Some
modifications were
driven by input
from user groups
and recognise
changes in
legislative and
social context.
4 survey instruments in
2 divisions:
1. Cross-section
survey with 3
components:
1. Managers Survey -
focussed on
activities, structure
and processes used
in workplaces.
2. Employee
representative
survey – focus as
above.
3. Employee survey -
focussed on
attributes of
employees and their
workplace
experiences.
2. Panel Survey
- respondent =
1. Managers Survey
N =2,295.
Response rate = 64
per cent
Sample frame = all
UK workplaces with
>5 employees.
2. Employee
representative
survey N=984
Response rate = 77
per cent
Sample frame =
workplaces included
in managers‘ survey.
3. Employee survey:
N = 22,451.
Response rate = 61
per cent
Sample frame = 25
randomly selected
employees at 76 per
cent of the
workplaces used for
the Managers‘ survey.
During the period from 1998
to 2004 there was:
? Continued decline in
union membership and
presence during the
period.
? Substantial increase in
the availability of
flexible working
arrangements, such as
flexi-time and job-
sharing
? Very little change in the
practices and outcomes
of employment relations
in the UK.
131
manager
- focussed on gleaning
detail of changes
between 1998 and
2004 Cross-section
Surveys
All questionnaires
sought a mix of self-
reported perceptions
and facts.
Panel Survey:
N = 938
Response rate = 75
per cent
Sample frame =
randomly chosen
from subset of cross-
section survey
respondents with >10
employees and
present in 1998
survey.
In all cases other than
the employee survey,
method based on
face-to-face interview,
using a structured
questionnaire.
Employee survey
based on self-
completion
questionnaire.
United Kingdom
High Performance
Work Practices:
linking strategy and
skills to performance
outcomes.
Department of Trade
and Industry (DTI)
and Chartered
Institute of Personnel
and Development
(CIPD)
Sung and Ashton,
2005
The aims of the
survey were to
establish how high
performance work
practices have
been utilised in the
UK and the
identification of
various
organisational
outcomes, both
financial and non-
financial.
Ten case studies
were also
undertaken to
demonstrate good
practice and
The study was
informed by
literature in the
areas of high
performance and
high involvement
work practices and
their relationship to
performance
outcomes.
The measures used in
the survey were the
respondents‘ self-
reported facts (on
practices implemented)
and perceptions of
non-financial
performance
outcomes.
The ten case studies
collected demographic
and financial statistics
as well responses in
semi-structured
interview regarding
high performance work
practices
implementation and
The frame for the
survey sample was
the membership base
of the CIPD.
The sample was
6,000 members
chosen at random.
N = 294, a response
rate of 5 per cent.
Questionnaires were
sent out to the sample
for self-completion.
The frame for the
case studies was
?The Sunday Times
100 Best Employers
The more high performance
workplace practices
(HPWP) an organisation
uses, the more effective it is
in delivering adequate
training provision,
motivating staff, managing
change and providing
career opportunities.
The more HPWPs an
organisation uses, the lower
the staff turnover.
Identification of three
bundles, or groupings of
HPWPs that are positively
correlated with various
organisational outcomes,
132
change
management
issues associated
with
implementation,
along with
business benefits
and the effects on
skills policies.
The unit of analysis
in each case was
the firm.
outcomes. to Work For 2004?,
with respondents
chosen to represent
?a variety of industrial
contexts, sizes and
product strategies?.
Descriptive statistics
and correlation
analysis were
reported.
contingent on strategy and
industry sector.
That successful
implementation of HPWPs
is lead by senior
management who develop a
strong supporting culture.
Hewitt Associates
Employee
Engagement Survey
See:
www.hewittassociates
.com
Survey identifies
the drivers of
employee
engagement and
quantifies the
return on
investment for
improving each
driver.
Unit of analysis is
the firm.
Draws on several
theories of
motivation such as
organisational
commitment, job
satisfaction and
citizenship
behaviour.
Self reporting
instrument against 3
constructs:
Say—employees
consistently speak
positively about the
organisation to co-
workers, potential
employees, and
customers.
Stay—employees have
an intense desire to be
a member of the
organisation despite
opportunities to work
elsewhere.
Strive—employees
exert extra time, effort,
and initiative to
contribute to business
success.
Structural equation
modelling. Requires
samples > 200.
Hewitt results have been
compiled from over 1500
global companies.
? For every 10 per cent
improvement in
employee commitment
to the organisation
there is a
corresponding 6 per
cent increase in an
employee‘s
discretionary effort, and
a reduction in likelihood
to depart by 9 per cent.
? Every ?engaged?
employee is worth an
average of $5,000 each
year in additional profit.
? Companies with a
workforce engagement
score of 60 per cent or
higher have an average
five-year shareholder
return of 20.2 per cent.
133
4.2. Survey Design
Researchers are concerned with the validity of the findings of their study. Validity refers to the degree to which a
study accurately reflects or assesses the specific concept that the researcher is attempting to measure. Reliability
is concerned with the accuracy of the actual measuring instrument or procedure. This research instrument has
been designed following scientific research principles. Construct validity and content validity are particularly
important and have been considered throughout the design of this survey instrument, as follows:
Construct Validity
Construct validity is particularly important to designing research questions. Construct validity seeks agreement
between a theoretical concept and a specific measuring device or procedure. For example, a researcher inventing
a new IQ test might spend a great deal of time attempting to "define" intelligence in order to reach an acceptable
level of construct validity. Construct validity can be broken down into two sub-categories: Convergent validity and
discriminate validity. Convergent validity is the actual general agreement among ratings, gathered independently
of one another, where measures should be theoretically related. Discriminate validity is the lack of a relationship
among measures which theoretically should not be related. To understand whether a piece of research has
construct validity, three steps should be followed. First, the theoretical relationships must be specified. Second,
the empirical relationships between the measures of the concepts must be examined. Third, the empirical
evidence must be interpreted in terms of how it clarifies the construct validity of the particular measure being
tested (Carmines & Zeller, DATE?). In each of the Key Sheets accompanying the surveys, we explain the
theoretical relationships between different measures. In addition, we have sought to use constructs that have
been tested and validated in academic research elsewhere.
Content Validity
Content validity is based on the extent to which a measurement reflects the specific intended domain of content
(Carmines & Zeller, 1991). For example, assume that researchers aim to study mathematical learning and create
a survey to test for mathematical skill. If these researchers only tested for multiplication and then drew
conclusions from that survey, their study would not show content validity because it excludes other mathematical
functions. In this study we have attempted to increase content validity by undertaking a comprehensive literature
review on the drivers of high performance in the workplace covering a wide range of disciplinary areas.
4.3. Survey Methods
At the completion of the literature review, the research team developed a conceptual model to be tested via an
on-line survey. This section of the report draws on the experience of the research team and the research methods
literature to review the online survey methodology.
Online surveys
134
Utilising the internet to conduct quantitative research presents opportunities and challenges not offered by
conventional research methods due to distinctive technological, demographic and response characteristics. The
online survey will include numerous features to support the research design.
Survey Features
Flexible design
The survey will be offered through a dedicated website that will be used as a platform to provide more information
about the project, the researchers and the Department of Education, Employment and Workplace Relations. The
web pages will include links to affiliated institutions to give the project credibility and ensure the participants can
verify the authenticity of the research, thus encouraging higher response rates (Joinson & Reips, 2007).
The survey will include prompts if a respondent skips a question, which Zhang (2000) found increases a
respondent‘s motivation to compete the survey. This feature also provides the research team with the potential to
track how respondents interact with the survey. It is possible to analyse the requests made to the server hosting
the survey to measure the number of people opening a survey, viewing particular pages and submitting
responses or leaving the survey without submitting. This can allow problems affecting response rates in particular
sections of a survey to be identified and dealt with.
Other features of the online survey which enhance the research design include the tailoring of question streams
according to information offered by respondents. For example, where a respondent indicates they are a manager,
additional questions or choices will be included and some questions framed in alternate ways. Pop-up instructions
and drop down choice boxes also assist with response rate (Joinson & Reips, 2007).
Speed and volume of data collection
The online survey will enable the research team to collect large volumes of data quickly and at low cost. Cook,
Heath and Thompson (2000) and Couper, Traugott and Lamias (2001) estimate that most people complete an
online survey within 48-72 hours of receiving it, making turnaround fast compared to other methods (i.e. post).
Accuracy of data
Data will be analysed continuously and directly imported into statistical tools and an SPSS database. This
ensures that data processing is automated, reducing human error in data entry and coding. Data will be
automatically validated because if a data value is entered in an incorrect format, the web-based program will
return an error message requesting the respondent to enter the data correctly and resubmit the survey.
Anonymity
Given the survey seeks information on levels of commitment to an employer and other sensitive data; we concur
with Braunsberger, Wybenga and Gates (2007) that people are more likely to answer these questions via an
online survey compared to onsite paper based surveys or telephone interviews where interviewer effect and
privacy issues may affect reliability.
135
The research methods literature identifies a number of potential problems with online surveys. The following
strategies will be implemented to minimise these problems.
Length, response and dropout rates
Response rates to online surveys drop off significantly after 15 – 20 minutes (Frick, Bachtinger & Reips, 2001);
with Witmer, Colman and Katzman (1999) finding longer surveys elicit a response rate of 10 per cent or lower.
Further, online surveys must be appropriate and justified given increasing levels of ?survey fatigue? (Witte, 2009).
The following actions will be in place to ensure acceptable response rates. Crawford et al. (2001) propose that a
single email reminder can double the number of respondents while Schaefer and Dillman (1998) found that four
repeated contacts yield the highest response rate. Therefore we will send reminders according to the response
rate that is obtained. In some cases only one reminder may be necessary; however additional reminders will be
sent when required.
Cook et al. (2000) suggest that response rates can also be improved with carefully worded introductory letters or
emails that include details of estimated time to complete the survey and a statement indicating that the
respondent is part of a small group chosen to participate in the study (Porter & Whitcomb, 2003) and requesting
personal information at the start of the survey rather than the end (Frick et al., 1999). A communication from the
Chief Executive Officer of the organisation emphasising the benefits of participating in the research will be
included.
Incentives
There is substantial evidence that responses to online surveys are enhanced through the provision of financial
and non-financial incentives. The positive effect of incentives on response rates and data quality has been
reported in various industries. For example, Shaw, Beebe, Jensen and Adlis (2001) found that a US$5 incentive
to each individual that completed a survey resulted in a significantly higher response rate than offering a US$2
incentive; however the $US2 incentive produced better results than not offering any inducement.
Other researchers have used different versions of non-cash incentives to measure the effects on response rates.
Vandermeer (2000) suggested that using a mobile phone recharge card as an incentive has a positive effect on
response rates, as do shopping vouchers or gift certificates. There is also the option of offering larger prizes, such
as electronic devices to a random sample of respondents, for example, every 50
th
respondent (Vandermeer,
2000). In this study, we are yet to determine whether an incentive to complete the online survey should be
offered. An alternative way to increase response rates is to secure CEO level support for the high performing
workplace agenda and have the CEO communicate the importance of the survey and agenda throughout the firm.
The latter could possibly be more effective than traditional incentives (such as movie tickets and the like).
Technical Problems
136
Various technical problems can occur with online surveys. A computer or server may crash, for example,
especially if the survey is long. We have minimised reliance on complicated features of the survey and will
undertake a comprehensive pilot to ensure there are no technical difficulties. In addition, the survey to employees
will be 15 minutes long and a helpdesk and hotline will be established and operate between the hours of 8.30 am
and 5.00 pm for the entire survey period to answer questions and provide technical support.
Sample bias and measurement error
There are social and spatial divides in access and use of the internet which can induce sample biases to the
research population. Bias is introduced when the respondents who answer an online survey have very different
attitudes or demographic characteristics to those who do not respond. This is particularly the case for online
surveys because some social groups are underrepresented among internet users, including people of limited
financial resources, members of some ethnic groups, older people and those with lower educational levels
(Umbach, 2004).
This proposed population for this study will be drawn from the services sector of the Australian economy. This
sector relies heavily on internet facilities to operate. Therefore any sample bias will be minimal.
Ethical issues
Protecting respondent privacy and confidentiality is a significant ethical issue. The research team will be vigilant
about only collecting information with respondent permission. Data security and the protection of the anonymity
and confidentiality of the respondent data is a priority. The survey and full research project will be subjected to the
scrutiny of the Australian Bureau of Statistics Clearing House and the University of New South Wales Ethical
Research Protocols before administration commences.
In summary, to improve the research design and response rate, the following actions will be implemented:
? Send introductory letter outlining project and estimated time needed to complete the survey;
? Include an institutionally sanctioned website to validate researchers‘ identity;
? Provide clear instructions on how to complete the survey;
? Request personal biography information at the start of the survey rather than the end;
? Use simple survey format and avoid unnecessary graphics;
? Avoid grid questions, open-ended questions and requests for email addresses;
? Design the survey so it takes approximately 15 minutes to complete;
? Use appropriate incentives if possible;
? Send one or two follow up reminders;
? Include ?social presence? or missing data messages to reduce item non-response;
? Emphasise confidentiality; and
? Establish a help desk and hotline.
137
5. Industry Sector Surveyed: Property and Business Services
5.1. Introduction
The sample of firms is concentrated on Property and Business Services (P&BS), which is one of 17 subsectors
that comprise the Australian economy.
28
This industry division is primarily concerned with the provision of
property services including property sales, operation and development and business services such as legal
services, advertising and cleaning. The industry division is important to Austral ia because of its scale (slightly
larger than the manufacturing sector on many economic characteristics) and its potential for both continued
export growth and the generation of well paid jobs. Key markets for this division include other industries,
government bodies and consumers.
5.2. Industry Composition: A Definition
The sample covers a wide range of service activities, primarily because Property and Business Services is a
diverse sector. Table 9 below gives a description of potential firm activities based on a detailed breakdown of
ANZSIC codes. It is apparent that the firms in this industry vary widely in a number of dimensions such as the
skills requirements (cleaning compared to accounting services) and their ease of exporting (compare residential
property operators, legal services and advertising).
Table 9: Description of Property and Business Services Industry
Industry Subdivisions
29
(2 & 3 digit ANSIC codes)
Examples of Included Business Activities (based
on4 digit ANZSIC codes)
77 Property Services
771 Property Operators and Developers Residential property operators, & commercial
property operators and developers
772 Real Estate Agents Real estate agents
773 Non-Financial Asset Investors Operators engaged in holding intellectual property or
other non-financial assets
774 Machinery and Equipment Hiring and
Leasing
Motor vehicle hiring, transport equipment leasing,
plant hiring.
78 Business Services
781 Scientific Research Scientific research
782 Technical Services Architectural, surveying, consulting engineering and
other technical services
783 Computer Services Data processing, information storage and retrieval,
computer maintenance and computer consultancy
784 Legal and Accounting Services Legal and accounting services
785 Marketing and Business
Management Services
Advertising, commercial art, market research,
business administration and business management
28
Based on the Australian and New Zealand Standard Industrial Classification (ANZSIC). The correspondences between ANZSIC 1993 and
ANZSIC 2006 are listed in ABS 1292.0, Australian and New Zealand Standard Industrial Classification (ANZSIC), 2006, (Revision 1.0),
chapter 10. ANZSIC 1993 L Property and Business Services corresponds to subsectors across ANZIC 2006 L Rental, Hiring and Real Estate
Services; M Professional, Scientific and Technical Services and N Administrative and Support Services. For comparability with historical data
this report will focus on industry sector ANZIC 1993 L.
29
Aged Care Residential Services although classified in the Health Care and Social Assistance industry, contains significant elements of
residential property services as well. This subcategory is not included in the industry characteristics and trends discussion of section 5.3 and
5.4. Aged Care Residential Services (ANZSIC 2006: 8601)
138
services
786 Other Business Services Employment placement, contract staff services,
secretarial, security, pest control, cleaning, packing
and other business services.
5.3. Economic Characteristics of the Property and Business Services Sector
30
? Contribution to GDP
31
: P&BS was the largest contributor to GDP in 2007-08 amongst the service
industries at $131.9 billion (14.4 per cent of total GDP). Services industries in total contributed $702.4
billion to GDP (76.6 per cent) compared to $106.8 billion from manufacturing (11.6 per cent).
? Employment
32
: PB&S is the second largest employer amongst service industries, employing 1.256
million people in 2007-2008 (12.1 per cent of total employment). This exceeded the share of total
employment for any other sector: manufacturing 10.4 per cent, mining 1.5 per cent and agriculture 8.3 per
cent.
? Earnings
33
: Median weekly earnings (full-time before tax) as at May 2006 in P&BS were $980, 8.9 per
cent higher than the ?all industries? average. There was great heterogeneity in median weekly earnings.
For example, the highest group, Computer Services, received $1231 while the lowest groups, Real Estate
and Other Business services received $800.
? Exports
34
: Transport and storage was the largest exporter in the services sector at $9.394 billion, closely
followed by P&BS at $9.316 billion. These are only moderate levels compared to manufacturing which
exported $88.5 billion in the same year.
? Firm demographics: Approximately a quarter of all Australian businesses are in PB&S (507,786)
dwarfing all other sectors.
35
? Financial Performance: Average sales and service income per employee (2005-06) by business size
are: $215371 (small), $184554 (medium) and $124741 (large).
36
? Innovation
37
: the proportion of innovating
38
businesses in the P&BS industry (2006 – 07) is 33.7 per cent
compared with 32.7 per cent for the economy as a whole and 44.2 per cent for manufacturing. This
30
Due to data availability, and to facilitate comparison, statistics are focused around the 2007-08 financial year, although in some cases only
earlier data is available.
31
Key Facts, Australian Industry 2007-08, DIISR.
32
ibid.
33
Employment Outlook for Property and Business Services, October 2007, www.skillsinfo.gov.au .
34
Key Facts, Australian Industry 2007-08, DIISR.
35
Source: ABS Cat. 81550 (2005-06). The distribution of firm sizes (2005-06) was small (<20) 96.6 per cent, medium (20-199) 3.03 per cent
and large (200+) 0.32 per cent.
36
ibid. Calculated as sales and service income divided by total employment in size subsample.
139
places P&BS in the middle of the field in terms of service industries in Australia.
39
5.4. Significant Trends
Growth in total value added (GDP) in P&BS in 2007-2008 was 5.7 per cent, significantly above both the service
industry average of 4.3 per cent and the overall rate for Australian Industries of 4.1 per cent.
40
The year-on-year
increase in gross value added has been positive and consistent, with the 20-year trend (1986-2006) slightly
stronger than the 5-year trend to 2006.
41
In 2007-2008 employment growth in P&BS was 4.3 per cent, significantly higher than the 1.5 per cent
experienced by the economy as a whole.
42
This strong employment growth is typical of the long run employment
changes in the industry. The 10-year annualised growth in employment to May 2007 was 3.9 per cent, which was
the strongest industry growth in Australia.
43
However growth in value added has not outpaced the increase in employment and, in general, labour productivity
growth (gross value added per employee) performance has been poor. The average annual percentage growth
rates for P&BS in Australia were -1.6 (1975-85), -2.0 (1985-95) and 0.9 (1995-2005). This pattern of slow growth
in labour productivity in P&BS compared to the economy as a whole has been observed in a number of other
developed nations, including the US, UK, France, Japan and Germany.
44
Starting in 2001, developments in ICT appear to have propelled a rapid expansion in world trade of services.
Average annualised growth rates in 2001-05 were 12.5 per cent. Of this expansion Other Commercial Services
has been the largest and fastest growing category, ahead of travel service and transportation services. Other
Commercial Services is a diverse category but in 2004, 50 per cent of the world trade in this category was from
business services.
45
Australia‘s experience of this expansion in services trade has been somewhat different, as the Department of
Industry, Tourism and Resources observed in Background Paper 3 (2007, p10), ?The composition of Australia‘s
service exports contrasts to other high-income economies with its high proportion of tourism exports, and
relatively low proportion of Knowledge-Intensive Business Services (KIBS)
46
exports.?
37
Source: Services Sector: Overview of Structural Change, Industry Brief 2007-08, Department of Innovation, Industry, Science and
Research.
38
Innovation is any new or significant improved product or service, new or significant improved operational process, new or significant
improved management process, or, new or significant improved marketing.
39
Besides issues of availability the ABS innovation data is to be preferred because ?…organisational innovation is very important in the
service sector but weakly reflected in R&D expenditure, as well as in patents data.? National Innovations System Review (2008, Chapter 1
page 7), DIISR
40
Source: Services Sector: Overview of Structural Change, Industry Brief 2007-08, DIISR, p98.
41
Background Paper 3: Austalian Services Sector Trends, 2007, Department of Industry, Tourism and Resources, p30.
42
Source: Services Sector: Overview of Structural Change, Industry Brief 2007-08, Department of Innovation, Industry, Science and
Research.
43
Employment Outlook for Property and Business Services, October 2007, www.skillsinfo.gov.au
44
Source for labour productivity data: EU KLEMS database as reported in Services Sector: Overview of Structural Change, Industry Brief
2007-08, DIISR. p19-20.
45
Background Paper 4 : Drivers of Change in Australian Industry, 2007, Department of Industry, Tourism and Resources, p8-10.
46
KIBS is the Finance & Insurance industry plus P&BS.
140
The short and long-term implications of these recent growth numbers are unclear as we move through a period of
pronounced economic uncertainty surrounding the Global Financial Crisis. It is clear however that Property and
Business Services is an important industry worthy of in-depth research.
5.4. Concluding Summary
Property and Business Services is a diverse industry of increasing importance to Australia. It is a large and
growing contributor to both employment and GDP, passing manufacturing in the last decade. Exports from the
industry have also been growing, and knowledge intensive business services, KIBS (of which P&BS are part), are
a major component of the world trade in services, although Australia has a smaller share of KIBS in its service
exports than other high income countries. Growth in labour productivity in P&BS has been slow in Australia and
that reflects a common trend across high income nations. What can be done to foster increased labour
productivity and continued export growth in the industry are key open policy questions.
141
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About the Society for Knowledge Economics
The Society for Knowledge Economics (SKE) is a not-for-profit organisation founded in June 2005. Members
include Microsoft, Westpac Banking Corporation, CPA Australia, PricewaterhouseCoopers, HP Enterprise
Services, and the University of New South Wales.
The SKE‘s vision is to make Australian workplaces the most innovative, productive and fulfilling places in the
world.
A leading knowledge economy is one that aims to better understand, develop and leverage the most potent force
in creating economic and social value today—its people and collective knowledge.
To this end, the SKE conducts industry-based research projects and prepares policy submissions, research
papers, thought leadership pieces and editorials to influence policy directions and management and leadership
practices in the Australian economy. Visit www.ske.org.au for more information.
SKE Research and Collaborative Projects
The SKE Industry Partnering and Research Program brings together representatives from private, public,
research and community organisations to investigate, research, test and develop practical programs and tools for
the benefit of Australian workplaces as a whole.
Some of our research partners include:
? Business Council of Australia
? Certified Practicing Accountant (CPA) Australia
? Department of Education, Employment and Workplace Relations, Canberra
? Department of Finance and Deregulation, Canberra
? Department of Innovation, Industry and Regional Development, the Victorian Government
? Innovation and Business Skills Australia
? Microsoft Australia
? New South Wales Department of Lands
? Organisation for Economic Co-operation and Development (OECD) World Intellectual Capital
Initiative
? University of New South Wales
? United States Enhanced Business Reporting Consortium (the U.S. Securities and Exchange
Commission)
? Westpac Banking Corporation
168
Research Reports:
• Society for Knowledge Economics (2009), Leading Australia to More Innovative, Productive and Fulfilling
Workplaces—The Role of Government, prepared on behalf of the Department of Education, Employment
and Workplace Relations, November, 2009.
• Society for Knowledge Economics (2009), Workplaces of the Future, prepared on behalf of the
Department of Education, Employment and Workplace Relations, for the Workplaces of the Future
Forum, Melbourne, July, 2009.
• Society for Knowledge Economics (2009), Enterprise Innovation, prepared on behalf of Innovation and
Business Skills Australia, for the Innovation and Business Skills Australia Innovation Summit, Parliament
House, Canberra, June, 2009.
• Society for Knowledge Economics (2009), Development of an Innovation Capability Framework and a
Library of Resources and Intervention Strategies, prepared on behalf of Innovation and Business Skills
Australia, January, 2009.
• Society for Knowledge Economics (2008), Enabling Innovation: Leadership, Culture and Management at
the Workplace Level, prepared on behalf of the Victorian Department of Innovation, Industry and Regional
Development, June, 2008.
• Society for Knowledge Economics (2008), Australia’s National Innovation System, submission to Dr Terry
Cutler‘s National Innovation Review Panel, sponsored by the Business Council of Australia, April, 2008.
• Society for Knowledge Economics (2008), Submission to the Enhanced Business Reporting Consortium
for the U.S. Securities and Exchange Commission’s Advisory Committee on Improving Financial
Reporting, January, 2008.
• Society for Knowledge Economics (2007), Leadership and Culture—the Missing Pillar of the National
Innovation Agenda, a response to the Victorian Government‘s proposed National Innovation Agenda,
November, 2007.
• Society for Knowledge Economics (2005), Intangible Drivers of Organisational Productivity and
Prosperity—International Trends and Developments in Extended Performance Management,
Measurement and Reporting, prepared on behalf of the Department of Finance, February, 2007.
• Business Council of Australia, in collaboration with the Society for Knowledge Economics (2006), New
Pathways to Prosperity—a National Innovation Framework for Australia, November, 2006.
• Society for Knowledge Economics (2005), Australian Guiding Principles on Extended Performance
Management—A Guide to Better Managing, Measuring and Reporting Knowledge Intensive
Organisational Resources, prepared in collaboration with CPA Australia, November, 2005.
doc_943842405.pdf
The Treasury Department‘s (2010) most recent Intergenerational Report projects that Australia‘s rate of economic growth will average 2.7 per cent a year over the next 40 years, down from 3.3 per cent a year over the past 40 years. National growth rates are determined by three supply side factors, population, participation and productivity, also known as the 3 Ps.
1
Leadership, Culture and Management Practices
of High Performing Workplaces
in Australia
Literature Review and Diagnostic Instruments
A report commissioned by the
Department of Education, Employment and Workplace Relations
January 10, 2011
2
Authored by Boedker C., Cogin J., Langford P., Meagher K., Mouritsen J., Runnalls M., Sheldon P.,
Simmons S. and Vidgen R.
Published January, 2011.
The text, data and content in the document may be reproduced providing that it is appropriately represented and
referenced and not used in a misleading context. If any material in this document is reproduced, it must be
appropriately referenced, the authors of the document listed in full, the title of the document specified, and the
UNSW copyright acknowledged.
Where any third party material has been referenced you will need to obtain permission from the parties concerned.
For any other use of this material please write to the authors of the report, as follows:
The University of New South Wales
Australian School of Business
Kensington, New South Wales 2052
Sydney, Australia
Email: [email protected]
Website: www.unsw.edu.au
This project has been funded by the Australian Government Department of Education, Employment and Workplace
Relations through the Workplace Innovation Program and the Society for Knowledge Economics, 2009.
Published by the Society for Knowledge Economics, Sydney, Australia, 2011.
ISBN: 978-0-9775436-2-5
© University of New South Wales, 2011.
3
Contents
EXECUTIVE SUMMARY ......................................................................................................................................................... 4
AUTHORS AND RESEARCH TEAM ......................................................................................................................................... 7
ACKNOWLEDGEMENTS ...................................................................................................................................................... 10
BACKGROUND ................................................................................................................................................................... 11
AIMS OF REPORT ............................................................................................................................................................... 12
1. INTRODUCTION ............................................................................................................................................................. 13
1.1. WHAT IS DRIVING CHANGE AND WHAT ARE THE IMPLICATIONS FOR ORGANISATIONS? ..................................................................... 13
1.2. WHAT IS A HIGH PERFORMING WORKPLACE? ........................................................................................................................... 15
1.3. A CALL FOR REFORM TO WORK SYSTEM DESIGN AND MANAGEMENT PRACTICES IN AUSTRALIA ......................................................... 20
1.4. WHO IS RESPONSIBLE FOR CREATING A HIGH PERFORMING WORKPLACE? ..................................................................................... 21
1.5. WHAT ARE THE POTENTIAL BENEFITS TO EMPLOYERS, EMPLOYEES AND POLICY MAKERS OF HIGH PERFORMING WORKPLACES? ............... 23
2. LITERATURE REVIEW: HIGH PERFORMING WORKPLACES .............................................................................................. 26
2.1. LEADERSHIP ........................................................................................................................................................................ 26
2.2. ORGANISATIONAL CULTURE ................................................................................................................................................... 32
2.3. HUMAN RESOURCES MANAGEMENT ....................................................................................................................................... 39
2.4. ORGANISATION DESIGN ........................................................................................................................................................ 50
2.5. INDUSTRIAL RELATIONS ......................................................................................................................................................... 60
2.6. TRAINING ........................................................................................................................................................................... 72
2.7. ACCOUNTABILITY AND MANAGEMENT ACCOUNTING CONTROLS ................................................................................................... 83
2.8. THE ROLE OF THE BOARD IN CREATING A HIGH PERFORMANCE WORKPLACE ................................................................................. 108
2.9. INFORMATION AND COMMUNICATION TECHNOLOGY ................................................................................................................ 110
2.10. FACTORS THAT CAN MODERATE FIRM PERFORMANCE ............................................................................................................ 116
3. BARRIERS TO HIGH PERFORMING WORKPLACE PRACTICES ......................................................................................... 119
3.1. A KNOWLEDGE PROBLEM .................................................................................................................................................... 119
3.2. AN IMPLEMENTATION PROBLEM ........................................................................................................................................... 119
3.3. AN UNWILLINGNESS TO RELINQUISH CONTROL ........................................................................................................................ 120
3.4. ACCOUNTABILITY AND MEASURING VALUE CREATION ............................................................................................................... 121
4. BACKGROUND TO THE DEVELOPMENT OF THE SURVEYS ............................................................................................. 122
4.1. REVIEW OF EXISTING WORKPLACE AND MANAGEMENT SURVEYS ................................................................................................ 122
4.2. SURVEY DESIGN................................................................................................................................................................. 133
4.3. SURVEY METHODS ............................................................................................................................................................. 133
5. INDUSTRY SECTOR SURVEYED: PROPERTY AND BUSINESS SERVICES ........................................................................... 137
5.1. INTRODUCTION ................................................................................................................................................................. 137
5.2. INDUSTRY COMPOSITION: A DEFINITION ................................................................................................................................ 137
5.3. ECONOMIC CHARACTERISTICS OF INDUSTRY SECTOR ................................................................................................................. 138
5.4. SIGNIFICANT TRENDS .......................................................................................................................................................... 139
5.4. CONCLUDING SUMMARY ..................................................................................................................................................... 140
BIBLIOGRAPHY ................................................................................................................................................................ 141
ABOUT THE SOCIETY FOR KNOWLEDGE ECONOMICS ....................................................................................................... 167
4
Executive Summary
The Treasury Department‘s (2010) most recent Intergenerational Report projects that Australia‘s rate of economic
growth will average 2.7 per cent a year over the next 40 years, down from 3.3 per cent a year over the past 40
years. National growth rates are determined by three supply side factors, population, participation and
productivity, also known as the 3 Ps.
Whilst over the past 40 years, the first two Ps have made a net positive contribution to economic growth, over the
coming 40 years they are projected to make a net negative contribution to growth. Population growth, for
example, is expected to slow slightly (with birth rates forecasted at 1.9 babies per female), and the participation
rate is expected to fall along with an ageing population. This means that demand for labour will outstrip supply.
The moral of this is that what happens to the 3
rd
P, productivity, will have a much greater impact on the rate at
which Australia grows and Australians enjoy rising living standards in future decades.
This report suggests that to lift Australian productivity in forthcoming years, policy makers and others need to
direct much more policy focus and effort at the workplace level, including the leadership, culture and management
practices that affect each worker every day.
Traditionally, the levers of intervention into workplace productivity have been directed towards: first, investments
into training and skills development; and, second, regulatory interventions (such as industrial relations reform, tax
incentives etc.) that aim to make companies more competitive and fair(er) places to work.
A third lever is that of leadership, culture and management practices and the impacts such practices can make on
workplace productivity and innovation. This was identified by the Deputy Prime Minister, Julia Gillard, at her
Workplaces of the Future Forum, in July, 2009. In a subsequent interview (The Australian, 2009), she explained
that ?last month's forum acknowledged the need to unlock the final piece of the productivity puzzle?, and that ?over
the coming months and years we will be looking at ways of embedding change through workplace relations,
innovation and leadership practices in workplaces". A further statement was made by Ms. Gillard, that:
"...to truly unlock the productivity of our nation … we need workplace leadership and the requisite
cultures and skills that will build upon the foundations of the Fair Work Act to encourage innovation,
employee engagement and cooperation in our workplaces."
1
At the Workplaces of the Future Forum, research was identified as a first important step to unlocking the
?productivity puzzle? and ?opening up the black box of management?. Evidence-based policy needs to be
grounded in reliable data about workplace performance, including the leadership, culture and management
practices that prevail in Australian firms and the productivity impacts these practices produce.
1
The Deputy Prime Minister‘s speech at the 15
th
World Congress of the International Industrial Relations Work Congress, August 24-27, 2009,
Darling Harbour Convention Centre, Sydney.
5
Not since the 1990s has Australia paid co-ordinated attention to work system designs and management practice.
Government initiatives in the 1990s included the Karpin Commission Report (1995), the Australian Workplace
Industrial Relations Surveys (1995, 1990), and the Best Practice Demonstration Program (Rimmer et al, 1997).
Yet, since then, little attention has been paid to these important areas of productivity enhancement. As an
example, Australia has not conducted a national workplace survey for the past 15 years.
This two year project is an initial step towards (re)starting a national discussion about the leadership, culture and
management practices that prevail in Australian firms. Recent research commissioned by the Department of
Innovation, Industry Science and Research shows that management practices matter to workplace productivity
2
.
This current study seeks to deepen our understandings of the intricate linkages between workplace productivity
and such practices. Specifically, this project identifies the attributes of high performing workplaces and tracks the
culture, leadership and management practices that result in higher firm performance (as measured by workplace
productivity, innovation, fairness and employee engagement).
The project‘s objectives are to:
1. Identify the attributes of a high performing workplace;
2. Assess, via a survey of 100-120 Australian firms, which workplaces are high performing (and which are
not), and why;
3. Implement a series of high performing workplace strategies with 20 of the surveyed firms over a 12
month period with a view to lifting firm performance;
4. Measure the impacts of the high performing workplace strategies, including any changes in workplace
productivity and innovation resulting from the introduction of new leadership, culture and management
practices.
Over the two year period, the project will produce three publications:
1. A report that outlines the survey instrument and a literature review that informs the development
of the survey instrument (as presented in this report). Once approved by DEEWR, the survey
instrument will be run with 100-120 firms in the services sector of the Australian economy;
2. A report that details the results of the survey. The report will identify the percentage of firms within the
sample population that are high performing (and which are not) and the types of leadership, culture and
management practices that high performing firms deploy and benefit from;
3. A Guideline for High Performing Workplaces. The Guideline will track and report on the effects of the
implementation of the high performing workplace strategies with 20 firms. It will also re-survey the 20
2
?The relative level of firm output associated with an increase of a single point in the management score is equivalent to a 56% increase in
the labour force or a 44% increase in invested capital? (Green et al, 2009, p.13).
6
firms, who have participated in the intervention strategies, and measure any changes in productivity and
innovation at the end of the 12 months period.
The results of the literature review (undertaken in Section Two of this report) suggest that high performing
organisations are those that:
? Excel at innovating and creating new products, services and business processes that meet, even
exceed, customer expectations and ensure organisational longevity;
? Achieve sound levels of productivity and financial performance;
? Achieve high levels of employee engagement and quality of life for employees;
? Provide fairness for people at work and for the stakeholders, customers and communities they serve.
The literature review also suggests that high performing organisations possess certain capabilities. They:
? Have leaders who truly care about enabling others to be the best they can and who seek to maximise the
potential and contributions of employees at all levels of organisational hierarchies;
? Have a change-oriented culture where people value, welcome, and even seek transformation and
innovation;
? Excel at collaboration and partnering internally and with customers and other stakeholders;
? Enable employees at all levels to participate in strategy design and decision making;
? Are responsive to shifts in customer preferences, changes in the environment, competition, etc;
? Have high levels of problem solving capability, knowledge acquisition and learning by all staff;
? Maximise the use of the full range of employee skills and abilities;
? Excel at utilising and adopting information and communication technologies;
? Use management accounting controls – like budgets, business plans, targets – to explore and debate
new and emerging business opportunities; and
? Constantly monitor and respond to changing customer needs and interests.
The survey instrument has been designed to test the hypothesis that the capabilities listed above result in higher
performance (as measured by workplace productivity, innovation, fairness and employee engagement).
Survey data will be collected from three sources: Chief Financial Officers
3
, Human Resources Managers, and
employees. Collecting data from three sources reduces problems like self-reported survey bias. It also means that
we can test the impact of management practices on firm capabilities and, ultimately, firm performance. In doing
so, we extend the focus of the survey from perception-based testing (as done in many popular employee surveys
and opinion polls) to identify the performance impacts of management practices and firm capabilities.
3
Financial data is collected from the Chief Financial Officer and is used to calculate actual profitability and productivity levels of the
participating firms. This contrasts previous surveys which use self-reported productivity data (see for example the UK Workplace Industrial
Relations Survey discussed in Section 4.2).
7
Authors and Research Team
The following researchers have authored this report (in alphabetical order).
Dr Christina Boedker
Senior Lecturer, School of
Accounting, Australian School
of Business, UNSW
Christina is the lead investigator and has led 12 research projects for the SKE. Her research
focuses on strategy and management controls, measuring and reporting intangibles and
intellectual capital, workplace innovation, and leadership, culture and management
practices for high performing organisations.
Christina has been awarded the 2009 Emerald/EFMD Outstanding Doctoral Research Award
in the Interdisciplinary Accounting Research category, Accounting, Auditing & Accountability
Journal; two Emerald Literati Network Awards for Research Excellence (2006, 2009); the UK
Advertising Standards Authority Award; the Mindshift Consulting Group Prize; Saunders
Harris’ Prize for Outstanding Academic Achievement; the Carlson Companies’ Award;
MGSM’s Award for Competitive Intelligence; and MGSM’s Award for Human Resources
Management. Christina and the SKE Corporate Members received an Honourable Mention
for Outstanding Achievement in Research and Development at the 2008 Business and Higher
Education Roundtable Awards.
Christina was born in Denmark. Prior to coming to Australia eight years ago she worked as
department head of operations at a large US based organisation for six years. She did her
undergraduate (1
st
class honours) in Economics in the UK, and holds a Master Degree in
Accounting, an MBA in Financial Management, and a PhD in strategy and management
controls.
Associate Professor Julie
Cogin
Head of School of Organisation
and Management, Australian
School of Business, UNSW
Julie is an Associate Professor at the Australian School of Business, UNSW. She has held
various senior leadership roles in the ASB including Associate Head of School and Associate
Dean (Education). Julie has extensive experience in researching high performing workplaces.
Recently, she led a major workplace survey with a large multinational corporation
investigating culture, leadership and management practices on multiple firm level
performance outcomes. Julie has written two books, several book chapters and has
published in prestigious international journals.
She has been successful in securing and leading several Industry and University grants. She
recently finalised an Industry Grant with National Australia Bank “People Management
Capabilities that Enhance Performance”.
Julie has received the 2008 Australian Teaching and Learning Council (previously Carrick
Institute) national citation for contributions to teaching in tertiary education sector; the
2007 University of New South Wales Vice Chancellor’s award for teaching excellence; and
the 2006 Australian & New Zealand Academy of Management (ANZAM) best HRM research
paper. Julie will play a key role in the design of the survey methodology, the literature
review and report write ups.
Professor Kieron Meagher
Economics, Research School of
Social Sciences, Australian
National University
Kieron's three main current areas of research are: the economics of organisations, in
particular (i) management decision-making and authority structures; (ii) spatial competition
and location theory; and (iii) political economics and voting theory.
The techniques employed in Kieron’s research include incentive theory, hierarchy theory,
discrete choice theory, Bayesian decision making and uncertainty, graph theory and the
numerical simulation of complex systems. He applies microeconomic theory to
understanding situations that are more complex than can be described by a traditional price
mechanism.
Kieron holds a PhD in Economics from Australian National University, a Master of Arts
Honours Mathematics from Waikato University, and a Bachelor of Arts Mathematics from
Waikato University. He is the Associate Dean (Higher Degree Research) at ANU.
8
Dr Peter Langford
Director of Voice Project and
Senior Lecturer, Macquarie
University
Peter has published, presented and consulted widely on topics including organisational
culture and climate, leadership, employee engagement, client loyalty and key account
management. He will be part of the research team, specifically the survey part.
He is the Director of Voice Project, a research and consulting practice based in the
Department of Psychology, Macquarie University. Voice Project is dedicated to using
organisational surveys to give critical stakeholders a voice and improve organisational
diagnosis and decision-making. In 2006, Peter won Macquarie University's Innovation Award
for industry partnerships developed through Voice Project. In 2007 Peter was awarded the
Elton Mayo Award for outstanding contributions to organisational psychology. He holds a
Bachelor of Science (Psychology) Honours; a Master of Psychology (Clinical), a Master of
Business Administration and a PhD.
Prior to working at Macquarie University, Peter was a consultant with Andersen Consulting
(now Accenture), working in change and project management consulting. Peter currently
lectures in human resource management and organisational psychology.
Professor Jan Mouritsen
Department of Operations
Management, Copenhagen
Business School, Denmark,
Visiting Professor, University
of New South Wales.
Jan brings extensive experience in measuring intellectual capital, innovation and high
performing work organisations. He will work with the research team on the literature
reviews, the design, analysis and collation of data from the survey and the final
recommendations including the guideline. Jan brings strong linkage with the European
research community.
Jan was the lead researcher on the Danish Intellectual Capital project, where over 100
Danish organisations produced Intellectual Capital statements over a 5 year period, the
largest IC project ever. The project was sponsored by the Danish Minister of Science,
Innovation and Technology. It resulted in the Danish Guideline on Intellectual Capital
Statements. Jan received a medal from the Danish Queen acknowledging the significance
and contribution of his work to the Danish Economy. Jan led the project team, many
research staff and PhD students.
Jan’s research is oriented towards understanding the role of management technologies and
controls in various organisational and social contexts. Jan has published in a large variety of
accounting and business management journals. Jan will be visiting Australia to partake in
this important project.
Mark Runnalls
Project Manager and PhD
Candidate, School of
Accounting, Australian School
of Business, UNSW
Mark Runnalls is a lead project manager of the project. He is a qualified Prince2 project
manager. During the last two years, Mark has worked on projects for organisations such as
DEEWR, the Victorian Department of Innovation and IBSA.
Prior to that, he spent twelve years as a Management Consultant and Partner with Ernst &
Young where he worked with Australian and international clients in the area of technology,
innovation and risk management. Mark is also a contract lecturer at UNSW on their post-
graduate degree program. In addition, Mark has worked for the UK Civil Service.
Mark holds the Prince2 and Managing Successful Programs qualifications, in addition to an
MBA from Imperial College, London, and a Bachelor of Arts (honours) from Cambridgeshire
College.
Mark recently enrolled in a PhD at UNSW. His research focuses on ambidextrous companies
and the use of management accounting controls in lifting workplace innovation and
outcomes.
9
Associate Professor Peter
Sheldon
School of Organisation and
Management, Australian
School of Business, UNSW.
Peter is an Associate Professor in the School of Organisation and Management at UNSW
where he has also been the School's Associate Head of School. A leading authority on
employers' associations in Australia, he has also published widely on international
comparative industrial relations, and employment relations in Italy, Sweden and South
Korea. Peter's other main areas of research expertise are in Australian industrial relations
history and he is developing new research projects on employment relations in China.
Peter has co-edited 3 books on Australian industrial relations and has a forthcoming co-
edited book on employment relations in China. He has also published more than 30 refereed
journal articles and 20 book chapters across his range of research interests. He is on the
Executive Committee of the Industrial Relations Society of NSW and on the editorial advisory
boards of three journals. Peter has been awarded the 2009 Vice Chancellor's Award for
Teaching Excellence; the 2008 Australian School of Business Bill Birkett Award for Sustained
Teaching Excellence, and the 2007 Australian School of Business Teaching Excellence Award:
“Outstanding Performance in Team Teaching’ (for COMM 5001).
Peter holds a BEc (Hons) from Sydney University and a PhD from Wollongong University.
Peter oversees the industrial relations aspects of the project.
Shaun Simmons
Project Manager and Research
Assistant, School of
Accounting, Australian School
of Business, UNSW.
Shaun joined the academic team at the Australian School of Business in 2008, having spent
thirty years in commerce. He originally spent a decade working as a Chartered Accountant in
public practice before taking on corporate roles in finance, strategy and marketing.
Shaun’s public company roles include appointments as Chief Financial Officer and as the
executive accountable for marketing and business strategy.
Shaun has an Undergraduate degree in accounting and a Masters degree in marketing, both
obtained from the University of New South Wales. He is also a member of The Institute of
Chartered Accountants in Australia.
Shaun is currently enrolled as a research student in the School of Accounting and works as a
sessional lecturer in post-graduate programmes and AGSM executive programmes. He will
be contributing to both the research and project management aspects of this project.
Professor Richard Vidgen
Head of School of Information
Systems, Technology and
Management, Australian
School of Business, UNSW
Following fifteen years working in the IT industry, Richard studied for a PhD in Information
Systems at the University of Salford and then spent 12 years at the School of management,
University of Bath, UK, where he was latterly Professor of Information Systems.
He has produced more than 130 publications, including two co-authored books on IS
development and research papers in journals such as Information Systems Research,
Information & Management, the Information Systems Journal, and the European Journal of
Information Systems. Richard has over 15 years of experience in survey design.
Richard’s current research interests include the application of complex adaptive systems
theory to the study of high performing agile software teams, coevolutionary theory, and the
evaluation of Internet quality (e.g., e-commerce sites, knowledge-sharing applications,
intranets).
10
Acknowledgements
This paper has been commissioned by the Workplace Innovation Fund within the Federal Government‘s
Department of Education, Employment and Workplace Relations (DEEWR) and the Society for Knowledge
Economics (SKE). The research is conducted by a team of researchers led by the University of New South Wales
(UNSW) in collaboration with the Australian National University and Copenhagen Business School.
The objective of the research is to examine the attributes of high performing workplaces in Australia and the role
of leadership, culture and management practices in lifting workplace performance. The SKE and UNSW are
grateful for this opportunity to work with the Federal Government, and for their support of this project. Specifically,
we would like to thank the following people for the opportunity to prepare this report:
? Jennifer Taylor, Group Manager, Tertiary Skills and Productivity Group, DEEWR.
? Anthony Fernando, Branch Manager, Workforce Development Branch, DEEWR.
? Richard Millington, Fund Manager, Workforce Development Branch, DEEWR.
? Phillip Steven. Innovation Team, Workforce Development Branch, DEEWR.
? Jenny Eccles, Assistant Director, Strategic Policy Group, DEEWR.
Thank you to Professor John Roberts from the School of Accounting, Sydney University, for writing the section on
the Role of the Board in Creating a High Performing Workplace. To gather input into this paper and to guide and
evaluate the research observations and recommendations, the SKE has put together a high profile Steering
Committee, whose members include:
? Karin Adcock, CEO, Pandora
? Matthew Ayres, Group Director, Strategy and Innovation, Lend Lease
? Iain Birks, CEO Australian Information Industry Association
? Professor Alec Cameron, Dean, Australian School of Business, UNSW
? David Caspari, Vice-President, HP Enterprise Services, South Pacific
? John Colvin, CEO, Australian Institute of Company Directors.
? Ruth Dunkin, Director, Policy, Business Council Australia
? Simon Edwards, Head of Government and Industry Affairs, Microsoft Australia
? Geoff Fary, Assistant Secretary, Australian Council of Trade Union
? Anthony Fernando, Branch Manager, Workforce Development Branch, DEEWR
? Associate Professor Peter Gahan, Monash University
? Professor Roy Green, Dean, School of Business, University of Technology Sydney.
? Sally Herman, General Manager, Corporate Affairs & Sustainability, Westpac Banking Corporation
? Justin Hill, Manager, Policy and Program Innovation, Enterprise Connect, Department of Innovation, Industry,
Research and Science (DIISR)
? Rosemary Howard, Executive Director and Conjoint Professor, Australian School of Business, UNSW
? Narelle Hooper, Editor, Boss Magazine
? Merran Dawson, Partner, Advisory Services, PricewaterhouseCoopers (PwC)
? Amanda McCluskey, Head of Sustainability and Responsible Investment, Colonial First State
? Clare Payne, Director, Integrity Office, Macquarie Bank
? Professor Richard Petty, President, CPA Australia
? Professor John Roberts, School of Accounting, Sydney University
? Associate Professor Peter Roebuck, Head of School of Accounting, UNSW
? Kim Schmidt, Director Human Resources, Woolworths
? Tim Sheehy, CEO, Chartered Secretaries Australia
? Robin Shreeve, CEO, Skills Australia
? Jennifer Taylor, Group Manager, Tertiary Skills and Productivity Group, DEEWR
? Pauline Vamos CEO, The Association of Superannuation Funds of Australia
? Steve Vamos, President, Society for Knowledge Economics
? John Vines, Chairman, Innovation & Business Skills Australia
? Jon Williams, Partner, PricewaterhouseCoopers
? Peter Wilson, National President, Australian Human Resources Institute
? Bill Withers, Chairman, Acquire Technologies
Thank you to two anonymous reviewers and also to the DEEWR reviewers for their helpful comments and
feedback on the paper.
11
Background
This is a 2 year project commissioned by the Department of Education, Employment and Workplace Relations
(DEEWR) to the Society for Knowledge Economics (SKE) in December, 2009. The project is related to the
Federal Government‘s Workplace of the Future agenda, the subject of a Forum hosted by Deputy Prime Minister,
the Hon Julia Gillard MP, in July, 2009.
The project will survey 100-120 firms on their leadership, culture and management practices to establish which
practices result in higher performance and which do not. The project will also track the implementation of a series
of high performing workplace strategies designed to lift workplace productivity within 20 of these firms over a 12
months period.
The project will produce three publications including: a survey instrument, informed by a literature review (as
presented in this report); the results of the survey; and a Guideline for High Performing Workplaces.
This project follows the SKE tradition of industry partnering and collaboration. The collaborating partners on this
project are the:
? Department of Education, Employment and Workplace Relations
? Society for Knowledge Economics
? University of New South Wales
? CPA Australia
? PricewaterhouseCoopers.
The project follows previous collaborative research projects and reports by the SKE, specifically:
• Society for Knowledge Economics (2009), Leading Australia to More Innovative, Productive and Fulfilling
Workplaces—The Role of Government, prepared on behalf of the Department of Education, Employment
and Workplace Relations, November, 2009.
• Society for Knowledge Economics (2009), Workplaces of the Future, for the Department of Education,
Employment and Workplace Relations, for the Workplaces of the Future Forum, Melbourne, July, 2009.
• Society for Knowledge Economics (2008), Enabling Innovation: Leadership, Culture and Management at
the Workplace Level, prepared on behalf of the Victorian Department of Innovation, Industry and Regional
Development, June, 2008.
• Society for Knowledge Economics (2008), Australia’s National Innovation System, submission to Dr Terry
Cutler‘s National Innovation Review Panel, sponsored by the Business Council of Australia, April, 2008.
• Society for Knowledge Economics (2007), Intangible Drivers of Organisational Productivity and
Prosperity—International Trends and Developments in Extended Performance Management,
Measurement and Reporting, prepared on behalf of the Department of Finance, February, 2007.
• Business Council of Australia, in collaboration with the Society for Knowledge Economics (2006), New
Pathways to Prosperity—a National Innovation Framework for Australia, November, 2006.
• Society for Knowledge Economics (2005), Australian Guiding Principles on Extended Performance
Management: A Guide to Better Managing, Measuring and Reporting Knowledge Intensive Organisational
Resources, November, 2005.
12
Aims of Report
The aim of this report is to develop a survey instrument to identify and examine high performing workplace
practices in Australian firms. Specifically, the instrument investigates the leadership, culture and management
practices of Australian firms and their effects on workplace productivity, innovation, fairness and employee
engagement.
To achieve this objective, this report undertakes the following:
? Presentation of a conceptual model showing the anticipated relationships between the different elements
of the proposed survey;
? A literature review of high performing workplaces to identify which firm practices and capabilities result in
higher performance;
? A brief review of the barriers that may exist to implementing high performing workplace practices;
? An assessment of previous and current workplace surveys, including those used overseas;
? A description of the survey design and method;
? A key sheet describing the survey questions and why they have been chosen;
? The proposed survey questions.
13
1. Introduction
The concept of ?high performing workplaces? has generated widespread debate and interest in recent decades.
Boxall and Macky (2009) track the term‘s popularity to an influential public report by the Commission on the Skills
of the American Workforce (1990), America’s Choice: High Skills or Low Wages!. This report outlines concerns
about American jobs and is critical of Taylorist work organisation and a top down, hierarchical approach to
management. It argues that technological advances are not sufficient to save domestic firms. Firms need to
undertake significant reforms to work system design and management practices to successfully compete in the
future (see also, Appelbaum & Batt, 1994; Appelbaum et al., 2000). Such reform involves investing in ?high-
performance work organisation? and lifting skills levels. Firm performance is improved by lifting employee
involvement and responsibility for decision making. Japan (?lean production?), Sweden (?socio-technical
systems?), Germany (?diversified quality production?) and Italy (?flexible specialisation?) have similarly pursued
various models to reform workplace management practices.
Two initiatives have recently unfolded in the United Kingdom. First, Lord Mandelson, Secretary of State for
Business, Innovation and Skills, have commissioned and released a report called Engaging for Success:
Enhancing Performance through Employee Engagement (MacLeod & Clarke, 2009). This similarly calls for a
greater focus on workplace reforms to lift the performance of UK companies and the well-being of people at work.
It argues that lifting employee engagement ?can be a key to unlocking productivity and to transforming the working
lives of many people? (MacLeod & Clarke, 2009, p. 3). The report sets out evidence that underpins what we all
know intuitively, which is that only organisations that truly engage and inspire their employees produce world
class levels of innovation, productivity and performance. Second, the UK Commission for Employment and Skills
(2010) have launched four research projects on High Performance Working (HPW) to assist UK employers adopt
HPW practices. These include a policy review, case studies of firm practices, a literature review and a survey
instrument to conduct with UK employers. According to the UK Commission (2010), HPW encompasses a holistic
way to effectively manage an organisation. It encourages firms to review their business strategies; move up the
value chain; raise their demand for high skills; reorganise their work; and by so doing improve skills utilisation in
the workplace and, hence, improve firm performance
1.1. What is Driving Change and What are the Implications for Organisations?
A high performing workplace agenda has evolved, in part, due to broader changes in the global economy (Hope &
Hope, 1998). The world has become more interconnected and interdependent, more globalised and more
competitive thanks in part to internet technology and deregulation. The speed of business is faster than ever and
industry boundaries are less clearly defined. As a result, businesses are facing higher levels of complexity,
uncertainty and change. Australian firms have to compete with both global and local firms, innovate more, and
continuously lift efficiency to survive in a global economy increasingly dominated by low-cost producers (e.g. India
and China).
14
Parallel to this is a transformation in the factors of economic production and the emergence of a so called
?knowledge economy?. The industrial economy (making tangible goods) has largely been superseded by a
knowledge based economy (delivering services and knowledge based solutions) (Table 1). Intangible resources,
– partnerships, customer relations, business processes, information systems and technology, organisational
culture and structure, and human capital – now inform much of global economic growth and gross domestic
product (GDP). In 2005, service-based industries comprised over 68 per cent of world GDP, up from 61 per cent
in 1990. Meanwhile, goods producing industries contribute 28 per cent to world GDP, down from 34 per cent in
1990, and agriculture 4 per cent, down from 5 per cent in 1990 (World Bank, 2005). Australian data for 2008–09
shows that the services sector accounts for 64 per cent of GDP (around 77 per cent of total industry value added)
(DIISR, 2009a), whilst the manufacturing industry accounts for 8.7 per cent of GDP (DIISR, 2009b). New
management skills and competencies are required to successfully manage and lead in the 21
st
century where
people and other intangibles are the main factors of economic production.
Table 1: Changes in the Factors of Economic Production
Economic
Activity
Factors of Economic
Production
Agricultural
Economy
Pre-1800
Harvesting
? Land
? Land owners and
workers
Industrial
Economy
18th to 20
th
century
Manufacturing
? Labour
? Machinery
? Raw material
Knowledge
Economy
20
th
century and
onwards
Mediation of
knowledge and
services
? Relational capital
? Structural capital
? Human capital
Source: Boedker et al (2005, p. 19)
The net effect of these wider socio-economic changes is that the demands placed on business are changing and
expanding. Morgan and Anthony (2008) point out that the performance criteria that organisations have to meet
have evolved in a time-based model (see Table 2). It is no longer enough to be effective, efficient or productive;
firms also have to be flexible, responsive, and creative. More recently, ‘sustainable? and ‘knowledgeable? have
been added as key value drivers, once again augmenting the demands placed on business. Shop floor
employees, who are closest to the customers, are amongst those with the greatest knowledge. In the words of
Charles Handy, the power bases of firms have shifted and the organisational hierarchies are now ?upside-down?.
According to Handy, the net effect of this is that business leaders increasingly need to govern with the consent of
those being governed. All of these things together require greater autonomy in planning and execution by
employees, new forms of leadership and more agile workplace structures.
15
Table 2: Performance Criteria that Organisations Have to Meet
Source: Authors’ development, adapted from Morgan and Anthony (2008, p. 28)
A high performing workplace is one that manages well a growing portfolio of performance criteria and the tensions
these create for managers, executives and board directors alike. Businesses, for example, have to balance
competing objectives such as:
? efficiency versus creativity;
? standardisation versus delegation;
? accountability and control versus flexibility and responsiveness;
? alignment and ?culture fit? versus diversity in values and beliefs.
To handle such tensions and often competing objectives, workplace design and management practices have to
change accordingly. Such changes are a central theme of discussion throughout this report.
1.2. What is a High Performing Workplace?
High performing workplaces have variously been defined as ?high-commitment management? (Arthur, 1994;
Pfeffer, 1998), ?high performance work systems? (Becker & Huselid, 1998) and ?high-involvement management?
(Guthrie, 2001). Arundel et al., (2007) examine ?high-commitment‘ and ?high-involvement? management practices
across firms in 15 European countries. They identify four types of work organisation:
? Discretionary Learning Organisation – an adhocracy typified by high levels of learning and task complexity
with much responsibility allocated to the employee;
? Lean Production – a European adaptation of Japanese methods typified by low levels of employee
discretion in work design;
? Taylorist – a hierarchical design with low employee discretion, and low levels of learning and problem
solving; and
? Traditional – with simple management structures.
The Arundel et al. (2007) study finds that Discretionary Learning Organisations outperform Lean Production,
Taylorist and Traditional firms. A learning organisation has high levels of learning and task complexity with much
responsibility for decision making and problem solving allocated to employees. Furthermore, work is organised to
stimulate interaction between people with a diverse set of experiences and competences. This increases
1960s 1970s 1980s 1990s 2000s 2010s
Effective Effective
Efficient
Effective
Efficient
Productive
Effective
Efficient
Productive
Flexible
Effective
Efficient
Productive
Flexible
Creative
Effective
Efficient
Productive
Flexible
Creative
Sustainable
Knowledgeable
16
knowledge transfer and ensures that changes in customer needs and preferences are spotted and responded to
resulting in the continuous development of new competencies, products and processes. In short, learning
organisations are those firms that have transitioned from a hierarchical, top-down, approach to management, to
one where self-control, innovation and empowerment are of at least equal importance. Along similar lines, the UK
Commission for Employment and Skills (2009, p. ii) proposes that high performance working is ?a general
approach to managing organisations that aims to stimulate more effective employee involvement and commitment
to achieve high levels of performance?.
In this report, we propose that high performing organisations are those that:
? Excel at innovating and creating new products, services and business processes that meet, even
exceed, customer expectations and ensure organisational longevity;
? Achieve high levels of employee engagement
4
and quality of life for employees;
? Achieve sound levels of productivity and financial performance;
? Provide fairness
5
for people at work and for the stakeholders, customers and communities they serve.
A challenge to workplace leaders and others is how to achieve these objectives.
The Conceptual Map on p. 19 summarises some key factors for consideration. These have emerged from the
literature review (see section 2) and informed the design of the survey instruments and questions selected for this
study, as follows.
First, the map shows that leadership is important to firm performance. Leaders influence firm performance in two
ways: first, through their choice and design of management control systems and practices and, second, through
their influence on employee behaviour via behaviours such as, symbolic gesturing, leading by example, and
recognising achievements. As an example, transformational leaders are those leaders who continuously seek to
transform organisations in order to remain competitive. They delegate authority and decision making power and
their leadership style is one that recognises that bosses are not omniscient and require input from followers to
maximise decision effectiveness. Transformational leaders care about enabling others and seek to maximise the
potential and contributions of employees. We call this enabling leadership at all levels. It assumes that leadership
can be practised by people at all levels of organisational hierarchies providing they are given the opportunity.
Transactional leaders, in contrast, tend to favour more strongly the close monitoring of employee behaviours and
4
Engagement is a reflection of how people feel about their work/workplace. It is related to employee motivation, job involvement and feelings
of empowerment (see Carless, 2004). In this study, we measure engagement using Mowday and Steers (1979) 9-item scale on employee
commitment (see also Thomas & Velthouse, 1990). See the Employee Key Sheet for more details on the three constructs that form part of this
scale.
5
For the purpose of this study, we use Parker et al‘s (1997) scale on fairness and organisational justice. This measures: 1) organisational
fairness in allocating effort and distributing rewards (distributive justice); 2) the extent to which employees have an appropriate level of voice or
choice (procedural justice). Yet, fairness can potentially be about other workplace practices beyond distributive and procedural justice. It may
be related to issues, such as ?opportunity to take initiative‘, ?opportunity to fully use skills and abilities at work‘, and ?opportunity to lead change‘.
The employee survey explores these issues and seeks to provide more insights into what constitute fairness in the workplace.
17
This study proposes that high
performing organisations are those
that:
? Excel at innovating and creating new
products, services and business
processes that meet, even exceed,
customer expectations and ensure
organisational longevity;
? Achieve sound levels of productivity
and financial performance;
? Achieve high levels of employee
engagement and quality of life for
employees;
? Provide fairness for people at work
and for the stakeholders, customers
and communities they serve.
are generally more concerned with reducing deviations, monitoring of activities and ensuring conformity to
predefined intents (see section 2.1. for a detailed discussion of leadership).
Second, management control systems and practices impact employee behaviour and the collective capabilities of
the firm. Systems and processes erect boundaries for what is
‘acceptable? and ‘desired? behaviour at work. They are there
when leaders are ‘absent‘ or ‘distant? and this is often the
case, especially in larger and medium sized firms. The good
news is that senior leaders and managers have a wide range
of ‘design options? at their disposal and lots of ‘choice? as to
how to configure their management control systems and
practices. The challenge is deciding which configurations to
choose and predicting the effects they are likely to have.
Employees can, for example, be organised into hierarchies
and silos, or into temporary, organic team-based structures
that emerge in response to changing customer requirements
and particular projects. Similarly, remuneration systems can
be designed to reward financial results in a narrow manner, or
non-financial results (such as customer satisfaction) more
broadly. Different configurations have different impacts on
staff behaviour and firm performance (see sections 2.3 to 2.9
for detail).
The above two factors (leadership and management controls) result in the creation of a range of firm capabilities
and employee behaviours. Based on the literature review in section 2, and as a third point, we propose that high
performing organisations are those that:
? Have leaders who truly care about enabling others to be the best they can and who seek to maximise the
potential and contributions of employees at all levels of organisational hierarchies;
? Have a change-oriented culture where people value, welcome, and even seek transformation and
innovation;
? Excel at collaboration and partnering internally and with customers and other stakeholders;
? Enable employees at all levels to participate in strategy design and decision making;
? Are responsive to shifts in customer preferences, changes in the environment, competition, etc;
? Have high levels of problem solving capability, knowledge acquisition and learning by all staff;
? Maximise the use of the full range of employee skills and abilities;
? Excel at utilising and adopting information and communication technologies;
? Use management accounting controls – such as budgets, business plans, targets – to explore and
debate new and emerging business opportunities; and
? Monitor and respond to changing customer needs and interests.
18
The antitheses to these characteristics include silo based organisations, top down approaches to decision
making, low responsiveness to change, low levels of learning and knowledge acquisition, and managerial
dependence on tight controls. The proposed workplace survey will capture where firms sit on a continuum of
these dimensions.
Fourth, firm capabilities and employee behaviours affect firm performance in two ways. One is via the cognitive
path traditionally pursued by firms. This is where the firm seeks to take greater advantage of employee skills and
knowledge and, as a result, experiences better performance. A second path is the motivational path, where the
firm is concerned with the well-being and emotional connections of the employee. Highly engaged employees are
less likely to leave and more likely to exert greater effort and this can improve firm performance.
Fifth, there are spill-over effects from the workplace into an individual‘s personal life and general well-being.
Inevitably people think about work outside of their working hours and their well-being at work affects their well-
being at home and in society. We call this the employee‘s quality of life and measure this as the individual‘s
general well-being, health and self-esteem. The aim is to test whether employees in high performing organisations
experience a better quality of life.
In summary, this study examines how different leadership styles and workplace practices affect employee
behaviour and employee engagement. It measures their effects on firm performance, but also, importantly, on
employees‘ quality of life.
19
20
1.3. A Call for Reform to Work System Design and Management Practices in Australia
Not since the 1990s have policy makers in Australia paid co-ordinated attention to work system designs
and management practice. During the 1990s, government initiatives included the Karpin Commission
Report (1995), the Australian Workplace Industrial Relations Surveys (1995, 1990), and the Best Practice
Demonstration Program (Rimmer et al., 1997).
The World Economic Forum‘s Global Competitiveness Report (2009-10) shows that when benchmarked
against other nations, Australia currently lags behind in terms of business management and innovation
capabilities (see Table 3). For example, in the ?capacity for innovation
6
? category, Australia ranks number
26 whilst Japan comes in at number 1, with the Scandinavian countries following closely thereafter.
Furthermore, on ?business sophistication - nature of competitive advantage
7
?, Australia ranks number 38
after countries such as Panama, Indonesia and Sri Lanka (Germany is number 1). A number of reasons
for these lower levels can be suggested, including culture and leadership styles that inhibit employee
engagement, collaboration and innovation at the workplace level
8
.
Table 3: Australia’s Ranking: World Economic Forums Global Competitiveness Report (2009-10)
Where Australia does well (<10)
Rank
(out of 133)
Secondary enrolment 1
Time required to start a business 2
Life expectancy 3
Average (10-25)
Ethical behaviour of firms 11
Firm-level technology absorption 16
Degree of customer orientation 17
Extent of staff training 18
Quality of management schools 18
Where Australia does not do well (>25)
Capacity for innovation 26
Brain drain 26
Pay and productivity 33
Business sophistication - Nature of competitive advantage 38
Education expenditure 42
Female participation in labour force 47
Source: World Economic Forum’s Global Competitiveness Report (2009-10)
6
This is measured as follows: In your country, how do companies obtain technology? (1 = exclusively from licensing or imitating
foreign companies; 7 = by conducting formal research and pioneering their own new products and processes).
7
This is measured as follows: On what is based the competitive advantage of your country‘s companies in international markets?
(1 = on low-cost or natural resources; 7 = on unique products and processes) .
8
Gallup Consulting (2009) suggests that around 80 per cent of people in Australian workplaces are not ?fully engaged at work‘.
Whilst interpretations of this data should be made with some caution, the study highlights that low levels of engagement has a
substantial impact on national productivity, costing businesses over $33 billion a year.
21
Furthermore, a recent study of Australian manufacturing firms by DIISR (Green et al., 2009) found that
Australian firms lag behind their international counterparts on human capital management practices. Out
of 16 countries, Australia comes in number eight, behind the United States of America, Canada,
Germany, Japan, Poland, Great Britain and Sweden.
A focus on continually up-skilling workers is important to lift firm performance and address workplace
challenges, such as those outlined above, and undoubtedly training will continue to be a critical policy
lever going forth. However, the training and education reform agenda is not necessarily the lone solution
to lifting workplace performance. In fact, some Australian studies have found that employees‘ skills are
not being fully utilised by their employers. Examining the extent to which workers make use of their
existing skills at work, Watson (2008) concludes that skills are underutilised in some sectors by up to 40
per cent, with the average level of skills underutilisation being around 10-15 per cent. The UK economy is
facing similar challenges. The most recent UK Workplace Employment Relations Survey (Kelsey et al.,
2006), for example, found that over 50 per cent of UK employees surveyed thought the skills they
possessed were higher than those required to do their job. Research by Felstead et al. (2007) in the 2006
UK Skills Survey similarly found that ?opportunities for the use of abilities? (skills utilisation) and
?opportunities to use initiative? were of central importance to UK employees and ranked higher than ?good
pay?, yet these priorities were not being met by employers. This lack of full use of existing skills is partly
due to a failure of workplace leaders to effectively engage their employees. This realisation that people
are not always given the opportunity to contribute to their full potential at work may well be the biggest
?skills and productivity crisis? we face today.
Evidence, such as that outlined above, indicates that a market failure exists and that Australian work
system designs and management practices are in need of reform. This report suggest that true ‘fairness?
in the context of the world we live in today needs to be redefined beyond the important aspects of basic
terms and conditions of employment and protection for workers to one that ensures that each individual is
enabled and encouraged to contribute to his/her fullest potential at work. Much more can be done to
strengthen work system design and management practices for the benefit of Australian firms. Specifically,
a greater focus on employee engagement can be a key to unlocking productivity and transforming the
working lives of many people. If the potential that resides in our workforce was more fully unleashed,
policy makers and executives alike could see a steep change in workplace performance.
1.4. Who is Responsible for Creating a High Performing Workplace?
All people at work are responsible for lifting workplace performance and turning Australian workplaces
into higher performing places to work. Indeed, through collective and cross-sectoral efforts, Australia
stands a chance of becoming a world leader in work systems design and management practices. Yet, to
22
A high performing workplace
agenda is one that is monitored and
steered by Board Directors,
developed and accounted for by
Chief Executive Officers, and
actioned and practiced by all
members of senior leadership teams
and functional divisions (be it Chief
Financial Officers, Operations
Managers, Heads of Sales, Heads of
Marketing, Legal Counsellors and
others). A HPW agenda cannot be
mastered by HR Officers alone.
achieve such audacious goals, reform is required. Accountability and transparency need to increase,
mindsets and beliefs need to change, awareness has to be raised, and education curricula broadened.
Traditionally, the debate on high performing workplaces has taken place in human resources (HR)
divisions and offices. HR Managers have been encouraged to be ?strategic advisors? to the CEO and ?a
genuine business partner? (Becker & Huselid, 1998, p. 97). HR is to assume a strategic role that, first and
foremost, is a resource that solves real business problems (Ulrich, 1997). Research reports various levels
of uptake, with some success stories. In some cases, HR continues to be treated as a support function.
This needs to change if Australia is to push through workplace reform and lift workplace performance.
Furthermore, engaging employees and creating a positive shift in their decision-making powers and
discretion to lead change cannot be mastered by HR
Officers alone. All senior business leaders (Chief
Financial Officers, Operations Managers, Heads of
Sales, Heads of Marketing, Legal Counsellors and
others) play a critical leadership role in proliferating a
high performing workplace agenda and enabling more
people to contribute to their full potential. A high
performing workplace agenda is one that is monitored
and steered by Board Directors, developed and
accounted for by Chief Executive Officers, and actioned
and practiced by all members of senior leadership teams
and functional divisions.
Boxall and Macky (2009) explain that engagement with a
high performing workplace agenda is becoming more widespread across disciplines in academic
literatures. It now traverses economics, operations management, industrial relations, in addition to
strategic HR. The high performing workplace agenda similarly needs to be actioned across all functional
areas by practitioners. Boxall and Macky (ibid, p. 5) argue that ?narrowly conceived, bundling is seen as
an issue of design within the components of an HR system: making training consistent with a change to
self-directed teams, for example?. Broadly conceived, it entails complementarities between changes in
HR systems and other strategic changes in the workplace or productive unit. Complementarity does need
to be considered within the domain of HR policies and practices but, more importantly, it needs to be
understood within the broader management system of the workplace or business unit. For this to occur,
in a high performing workplace, every manager is a ‘people manager? and trained to lead, mentor,
motivate and enable people to contribute their fullest at work. This requires up-skilling of Australian
managers and leaders, including education and training curricula that extend beyond technical skills
development to include a much stronger focus on leadership and people management skills.
23
A study in the USA by Black and
Lynch (2003)
used data from the US
Bureau of Labour Statistics and
Worker Employer Surveys and found
that innovations to workplace
practices – such as re-engineering,
job rotation and organising workers
in teams – was an important
component of total factor
productivity and accounted for as
much as 30 per cent of output
growth amongst US firms; - that is,
up to one third of US output growth
stems from productivity-enhancing
innovations at the workplace level.
1.5. What are the Potential Benefits to Employers, Employees and Policy Makers of High
Performing Workplaces?
A growing body of research suggests that the quality of leadership, culture and management inside
organisations directly impacts on employee engagement, productivity and firms‘ capacity to innovate.
Black and Lynch (2003)
used data from the US Bureau of Labour Statistics and Worker Employer
Surveys and found that innovations to workplace practices in the USA – such as re-engineering, job
rotation and organising workers in teams – are important components of total factor productivity. They
account for as much as 30 per cent of output growth amongst US firms; that is, up to one third of US
output growth stems from productivity-enhancing innovations at the workplace level.
The UK Work Foundation‘s (2003, 2005) study, Cracking
the Performance Code, found that the best managed 30
per cent of UK companies achieve higher growth, sales
per employee, profitability and exports. The study also
found that increasing the performance of just 10 per cent
of companies in the bottom third to the average level
would add GBP 2.5 Billion to UK GDP and 0.25 per cent
to trend growth.
A London School of Economics / McKinsey (2007) study
of Managerial Practices and Productivity across 16
countries found that,
improving management practice is ... associated with
large increases in productivity and output. Across all the firms ... a single point improvement in
management practice score is associated with the same increase in output as a 25 per cent increase
in the labour force or a 65 per cent increase in invested capital.
A study on behalf of the Irish Government‘s National Centre for Partnership and Performance by Flood
and his colleagues (2008) found that adoption of a high performance work agenda (including strategic
HR) was associated with a 15 per cent increase in labour productivity, or EUR 44,000 per employee,
equivalent to EUR 12 million per median company. Good management practices were also associated
with an 8 per cent reduction in employee turnover, or the equivalent to the retention of an additional 2
employees per median company.
The Watson Wyatt study (2008/09), WorkUSA Survey, found that when employees are highly engaged,
their companies achieved 26 per cent higher labour productivity, lower turnover, and 13 per cent higher
returns to shareholders over a 5 year period.
24
There are additional social and economic benefits associated with improving leadership, culture and
management practices and lifting employee engagement. Engagement is not just about lifting
productivity, it is also importantly about creating personal wins and better working lives for the individual.
When individuals are engaged in meaningful work that provides positive emotional experiences, their
psychological well-being is enhanced. Research in the popular press and elsewhere shows that
engagement has numerous positive effects on employee health, well-being, and stress levels. MacLeod
and Clarke (2009, p. 14), for example found that engaged employees in the UK take an average of 2.69
sick days per year; the disengaged take 6.19.
The CBI [UK's top business lobby organisation] reports that
sickness absence costs the UK economy £13.4bn a year. Furthermore, employees who are absorbed in
their work (cognitively engaged) are more likely to have six key positive emotions at work (enthusiasm,
cheerfulness, optimism, contentment, to feel calm and relaxed) than negative ones (feeling miserable,
worried, depressed, gloomy, tense or uneasy) (MacLeod & Clarke, 2009, p. 60). Black (2008, p. 61)
author of an influential review of the Health of Britain‘s Working Age Population called Working for a
Healthier Tomorrow, similarly emphasised that, ?for most people, their work is a key determinant of self-
worth, family esteem, identity and standing within the community, besides of course material progress
and a means of social participation and fulfilment. Work stress can also have spill-over effects into family
and personal lives and cause people to behave poorly with friends or family members ( MacLeod &
Clarke, 2009, p. 30).
Sceptics have taken less kindly to the notions of empowerment, commitment and employee engagement.
Some view employee engagement as ‘capitalism in disguise? whereby firms can make more profit by
intensifying the work of employees. For example, Wilkinson (1998, p. 40) suggests that empowerment
can be a hollow term. He argues that ?most (initiatives) are purposefully designed not to give workers a
very significant role in decision making but rather to enhance employee contribution to the organisation.?
Webb (1995, p. 107), similarly, argues that, ?[...] they merely disguise an intensification of work, increased
surveillance and management over labour with cosmetic language of teamwork and personal
empowerment?.
MacLeod and Clarke (2009, p. 9) respond to such concerns by saying that, although improved
performance and productivity are at the heart of engagement, these cannot be achieved by a mechanistic
approach, which tries to extract discretionary effort by manipulating employees‘ commitment and
emotions. They (ibid) argue that employees will ?see through such attempts very quickly? and that this will
lead instead to cynicism and disillusionment. By contrast, engaged employees freely and willingly give
discretionary effort, not as an ?add on?, but as an integral part of their daily activity at work.
The evidence appears to indicate a strong link between workforce practices (including leadership, culture
and management) the wellbeing and fulfilment of people at work, and workplace productivity. This needs
25
not be a trade-off, or win-lose situation where employees lose out, but rather a situation where benefits
accrue to employees and employers alike.
In summary, better understanding and exploiting the link between high performing work system designs,
employee engagement and firm performance represents fertile ground and offers substantial potential
economic and social benefits to nations that enact change to this end.
26
2. Literature Review: High Performing Workplaces
This section reviews the literature on the leadership, culture and management practices that enable or
inhibit the achievement of improvements in productivity, innovation, employee engagement and fairness
at work. This then serves to identify questions for the three surveys (to CFOs, HR Managers and
Employees). The fields reviewed are: leadership, culture, human resources management, organisational
design, industrial relations, training, management accounting control and accountability, board
governance and information, communication and technology
2.1. Leadership
2.1.1. Introduction
In this section, we define leadership and describe different leadership styles identified in the research
literature. We then discuss a useful classification system for grouping the wide range of leadership
behaviours. Results generally show that transformational leadership style and behaviours are empirically
linked to high performing workplaces with there being a significant positive effect on organisational
performance (financial and other subjective measures), employee engagement, productivity and
innovation.
2.1.2. Typologies of Leadership Behaviour
In his well-respected book, Yukl (2009) describes leadership as a process whereby intentional influence
is exerted by one person over other people to guide, structure and facilitate activities and relationships in
a group or organisation. Nevertheless, there are differences among authors over a number of aspects,
such as who exerts the influence, the intended beneficiary of the influence, the manner in which the
influence is exerted, and the outcome of the influence attempt.
People at all levels of organisational hierarchies can lead change in the workplace, and there is a
persuasive argument that a high performing workplace is one where employees at all levels of
organisational hierarchies are encouraged, enabled and motivated to contribute to their full potential and
actively lead change and workplace transformation (Society for Knowledge Economics, 2009).
There are several leadership styles identified in the literature. By frequency of publications, the dominant
contemporary approach contrasts transactional and transformational leadership styles. This is also a very
pertinent distinction for examining the role of leadership in achieving high performance workplaces. As a
result, discussion of these two styles will form the basis of this review. Other, new theories of leadership
appear regularly, such as ethical, spiritual, servant, and authentic leadership (Yukl, 2009). However, none
have developed a similarly mainstream body of research.
27
Transformational leadership is
based on the recognition that
leaders are not omniscient and
require input from followers to
maximise decision effectiveness.
A key trait of strong leaders is their
ability to enable others to achieve
their full potential and to encourage
leadership at all levels of
organisational hierarchies.
Greater enablement of people at
work can lift employee engagement
and productivity. It can also
increase innovation by encouraging
diversity and lateral thinking
(Carless, 2000).
Transactional Leadership
Transactional leadership involves a give-and-take transaction, with leaders directing and monitoring
follower behaviours. In exchange, followers receive monetary reward for their effort (Avolio et al., 1999,
Elenkov, 2002). The essence and origins of transactional leadership draws on the origins of management
science. These origins include Taylor‘s (1911) theory of scientific management and the five core
leadership priorities of Fayol (1949, [1916]): planning; organising; commanding; coordinating and
controlling.
This early control orientation for leadership was supplemented by a greater people orientation during the
1920s and 1930s when the Human Relations Movement highlighted the impact of social relations and
employee satisfaction on employee productivity. Experiments on factory workers at the Hawthorne Works
(Roethlisberger & Dickson, 1939), followed by similar work by Mayo (1933), suggested that showing
concern for workers‘ needs may provide alternative avenues for raising organisation performance. As
such, the notion of the transaction between leaders and followers was expanded beyond simply being
financially rewarded for following directions, to also being
rewarded through the provision of attention and
recognition.
This dual focus continued within the literature as research
programs at Ohio State University in the 1950s found two
broad categories of transactional leadership behaviours
that researchers labelled ?initiating structure? and
?consideration? (Stogdill & Coons, 1957). Subsequently,
Blake and Mouton (1964) proposed their famous
?managerial grid? which described behaviour in terms of
?concern for production? and ?concern for people?.
More recently, Avolio and colleagues (see Avolio et al.,
1991, Avolio et al., 1999, Howell & Avolio, 1993) have
proposed three characteristics of transactional leadership
behaviours. They are; active management by exception (fault
finding and enforcing rules to avoid errors); passive management by exception (use of punishment for
unacceptable performance standards); and contingent reward (providing rewards, incentives and
recognition as a means to encourage the repetition of desired behaviours).
Transformational Leadership
The thinking behind transactional leadership was developed in a period where markets were relatively
stable and the focus of leadership was to manage operations consistently over-time. Transactional
leadership assumes that the leader possesses full knowledge of required behaviours, and the objective of
28
leadership is to direct and control follower behaviour. The latter half of the 20
th
century, however, has
seen increasing globalisation, innovation and competition. Leadership has increasingly been required to
change or ?transform? organisations in order to remain competitive, with the recognition that leaders are
not omniscient and require input from followers to maximise decision effectiveness. It is this more recent
focus upon organisational change that has lead to the development and current dominance of the
transformational theory of leadership.
Bass (1985), one of the original researchers on this topic, described the essence of transformational
leadership as:
(1) Making followers more aware of the importance of task outcomes;
(2) Inducing followers to transcend their self-interest for the sake of the organisation or team; and
(3) Activating followers‘ higher-order values (such as contribution to one‘s community).
In the broader literature (e.g., Podsakoff et al., 1996) the common characteristics of transformational
leadership have included:
(1) Communicating an exciting vision that appeals to the values of followers;
(2) Setting high expectations for performance;
(3) Being a credible role model by ?walking the talk?;
(4) Showing care and respect towards followers;
(5) Intellectual stimulation of followers by encouraging creative problem-solving; and
(6) Fostering collaborative behaviour among followers.
Transactional leadership encourages follower compliance through financial and social rewards and
punishments. In contrast, transformational leadership focuses on influencing follower behaviour by
increasing followers‘ belief in the importance of the goal, belief in their own abilities, trust in the leader,
and involvement in decision-making (Yukl, 2009; see also Carless, 2000).
Models of Leadership
There is widespread belief, particularly in popular management texts, that transformational leadership
rather than transactional leadership behaviours are more likely to generate high performing workplaces.
Nonetheless, the body of empirical research paints a slightly more complex picture. Indeed with both
transformational and transactional leadership appear to play important roles in achieving these desired
organisational outcomes (Elenkov, 2002; Howell & Avolio, 1993; O'Regan & Ghobadian, 2006,;Yukl,
2008). Firms have to both explore opportunities and innovate for the future, which is where
transformational leadership appears particularly relevant. Yet, they also need to exploit existing resources
for the present and this is where transactional leadership can play a role. Business managers therefore
face challenges over choices and priorities of approach.
29
In an effort to provide an overarching model of leadership, Yukl (2009) proposed a broad three-
dimensional classification of leader behaviours. Yukl labelled the three high-level categories of behaviour
as:
(1) Task oriented (planning, clarifying and monitoring);
(2) Relations oriented (supporting, developing and recognising); and
(3) Change oriented (being innovative and persuasive).
Such a typology has received support from Australian research (Langford & Fong, 2008) that found that
an extensive list of leadership behaviours factor analysed into three broad factors that the researchers
labelled as ?results?, ?people?, and ?change?. This shows the complex demands placed on leaders to
perform many roles and possess the flexibility to adapt to changing requirements and circumstances.
The categories of leadership, described above, show a link with Quinn‘s widely used model of
organisational culture, the Competing Values Framework (see section 2.2 below for more details). This
empirically supported model (e.g., Kalliath et al., 1999; Xingxing et al., 2010) poses four broad
orientations of organisations originally labelled as ?internal process?, ?rational goal?, ?human relations?
and ?open systems?. One can more simply label these as ?control?, ?results?, ?people? and ?change?
orientations. The control orientation is closely associated with transactional leadership. Various elements
of transformational leadership are associated with a change orientation (being visionary and innovative),
a results orientation (having high performance expectations) and a people orientation (showing care and
respect, communicating, and fostering collaboration).
For this study, we are less concerned with measuring transactional leadership. We recognise the
importance of transactional leadership and a control oriented (exploit focused) culture. Yet, we wish to
explore in more detail the extent to which leaders in Australian firms manage to achieve a healthy
balance between exploit and explore and whether a transformational leadership style has sufficient
presence in firms.
2.1.3. Linking Leadership to High Performing Workplaces
For the purposes of the current study, high performing workplaces are defined as those that result in
outcomes of innovation, productivity, high levels of employee engagement and fairness. As described in
the following sections, both transformational leadership, and in some circumstances transactional
leadership, have been positively linked to financial and other subjective measures of organisational
performance (Elenkov, 2002, Garcia-Morales et al., 2008a, Garcia-Morales et al., 2008b, Howell &
Avolio, 1993).
Employee Engagement
30
This survey uses the
Transformational Leadership
Scale by Carless (2000) where
leaders exhibit the following
behaviours:
(1) Have a vision
(2) Develop staff
(3) Give recognition to staff
(4) Involve staff in decisions
(5) Are innovative
(6) Practise what they preach
(7) Are worthy of respect.
To this we have added 3
dimensions for testing, including
leadership at all levels,
responsiveness to criticism and
people management.
Employee engagement is used to refer to a person‘s positive and constructive attachment to, involvement
in, and intentions toward their work and organisation. There is no widely accepted definition of
engagement, although general opinion is that engagement is an overarching construct that comprises
and integrates previously studied, self-reported employee outcomes (Macey & Schneider, 2008).
Langford and colleagues have demonstrated that organisation commitment, job satisfaction and intention
to stay are three empirically distinct components of engagement (Langford, 2009). Other constructs that
have been associated with engagement include citizenship behaviours, discretionary effort, and
proactivity (see the discussion articles in the same edition as Macey & Schneider, 2008).
Despite its importance as an outcome measure, there is limited published research linking leadership
with measures labelled as ?employee engagement? due, in part, to the recency and uncertainty
surrounding the construct of employee engagement. There
is, however, an extensive literature demonstrating the
impact of leadership behaviours upon components of
engagement such as commitment, satisfaction and
intention to stay. Of a broad range of possible cultural
contributors to engagement, trust in senior leadership has
consistently proven itself as one of the strongest
predictors of employee engagement (Langford, 2009;
Papalexandris & Galanaki, 2009; Podsakoff et al., 1996).
For example, using the ?Transformational Leadership
Scale‘ in a survey of 1539 employees and 1200
managers, Podsakoff et al. (1996) examined the link
between leader behaviours and components of employee
engagement (namely, satisfaction, commitment, trust and
citizenship behaviours). Participants were from the United
States and Canada, from a wide variety of industries (such
as financial, petroleum, and food) and company sizes. Leader behaviours that had a significant positive
effect on employee engagement included vision articulation, individualised support, providing an
appropriate role-model, and fostering acceptance of group goals. In particular, ?individualised support?,
reflecting the previously discussed people orientation, was most closely associated with employee
engagement and employee self-reports of performance. As the authors concluded (ibid, p. 290),
These results suggest that employees who perceive their leaders to provide individualised support
generally trust their leaders more, and are better ?sports‘, more satisfied, productive, altruistic,
conscientious, courteous, experience more role clarity and less role conflict, and exhibit more civic
virtue, than do employees who perceive their leaders to provide less support.
31
Productivity
A significant criticism of the enormous body of research into leadership, including that by Podsakoff et al.
(1996), is that the primary outcomes measured are employee self-reports of engagement-related
outcomes such as satisfaction, commitment and trust. Most of the studies that claim to show relationships
between leadership behaviours and organisational outcomes such as productivity and innovation levels
also unfortunately use employee self-reports of those outcomes. Of the hundreds of studies examining
the impact of leadership on outcomes, only a handful present empirical evidence confidently linking
leadership behaviours to objective measures of productivity. Summarising the existing literature in a
meta-analysis of 13 studies, Burke et al. (2006) examined the relationship between leadership
behaviours and independent team performance outcomes such as productivity (measured by the quantity
of items produced). They found evidence of the positive impact of both results-oriented and people-
oriented leadership behaviours on team productivity. The authors (2006, p. 303) concluded that the,
results suggest that both task- and person-focused leadership are almost equally important in team
effectiveness and explain significant amounts of respective variance in team productivity. ... This
result provides support for the recommendation that leaders need to be trained in both types of
behaviour as they both contribute and are needed for teams to be effective. . . [A further]
recommendation to those charged with leader development might be to pay special attention to the
development of boundary spanning [i.e., developing collaborative relationships with stakeholders
outside the team] and behaviours related to empowerment (i.e., coaching, feedback, monitoring,
participatory behaviour), as these two behaviours explained moderate-large amounts of variance in
team performance outcomes.
Innovation
Transformational leadership behaviours have been positively linked to workplaces that are described as
innovative (Garcia-Morales et al., 2008a, Garcia-Morales et al., 2008b, Gumusluoglu & Ilsev, 2009; Jung
& Chow, 2008; Jung et al., 2003; O'Regan & Ghobadian, 2006, Reuvers et al., 2008, Sarros et al., 2008,
Society for Knowledge Economics, 2008). However, results have been mixed regarding precisely which
types of behaviours are associated with innovative workplaces. For example, Sarros et al. (2008)
surveyed 1158 managers in the Australian private sector using Podsakoff et al.‘s (1990)
?Transformational Leadership Inventory‘ and found only two of the six transformational leadership factors
– articulating vision and providing individual support – were positively related to an innovative culture.
Articulating a vision involved behaviours such as seeking new opportunities and communicating plans to
followers. Individualised support involved behaviours such as showing respect for individuals‘ needs and
behaving in a way that shows consideration for the opinions and emotions of others. As Sarros et al.
(2008, p. 154) concluded,
Vision is a major facet of transformational leadership and is strongly associated with organisational
culture and innovation. . . A leader with vision creates a culture of change that facilitates innovation. . .
32
[However,] articulating a vision can achieve results only when its development involves those it is most
intended to influence – the workers and clients of the organisation.
As with the bulk of the literature examining leadership and productivity, however, the body of literature
examining leadership and innovation has focused upon self-reported subjective measures of innovation.
Within the scope of the current literature review, the authors were unable to find any studies that directly
linked leadership behaviour with independent, objective measures of innovation. This gap in the literature
provides a clear opportunity for the current study to contribute substantially to existing knowledge by
using objective outcome measures associated with innovation.
Fairness
To the extent that trust reflects an equitable environment, many of the studies cited above in the section
on employee engagement discuss the positive impact of leadership behaviours (in particular participative
and transformational behaviours) upon trust. Indeed, there is a growing literature examining the
relationship between fairness (typically measured as justice) and leadership, transformational or
transactional (van Knippenberg & De Cremer, 2008; Walumbwa, et al., 2008; Kirkman, et al., 2009).
2.1.4. Concluding Summary
Leadership is the process by which one person influences the behaviour of another in order to achieve a
specific goal. Transformational leadership theory is the dominant contemporary model of effective
leadership. It suggests that leaders are most effective when they communicate a challenging vision, show
care, foster creativity and encourage involvement in action-planning.
We focus on transformational leadership in the current study, and hypothesise that this leadership style
will be most effective to lifting workplace performance. We would expect to see an interaction between
leadership and organisational culture (and management practices in general), such that performance will
be higher when there is complementarity between leadership style and organisational culture that prevail
in the firm. That is, we would expect that a transformational leadership style will be more effective – in its
effects on organisational performance – in change-oriented cultures, whereas transactional leadership
styles will be more effective in control-oriented cultures.
2.2. Organisational Culture
2.2.1. Introduction
An organisation‘s culture is a shared set of values and practices, which have formed over time in
response to needs and influences of the organisation‘s internal and external environments (Hofstede,
33
Organisational culture is a shared set of
values, norms and underlying assumptions
(Schein, 1985).
Quinn and Rohrbaugh (1981) propose four
different kinds of culture, which assist in
achieving different business objectives:
? Control orientation (ensuring management
control and stability)
? Results orientation (achieving outcomes)
? People orientation (providing care and
collaboration among employees)
? Change orientation (striving for innovation
and responsiveness)
A high performing firm may need a
combination of these. Importantly, it is
aware of its orientation and how culture
contributes to creating business strengths
and weaknesses.
2003; House et al., 2004; Rousseau, 1990, Schein, 1985)
9
. Values are underlying beliefs and priorities
regarding certain states and outcomes, which influence more observable practices such as behavioural
norms and institutional structures. These, in turn, impact organisational outcomes such as productivity,
innovation, employee engagement, and fairness.
2.2.2. What is Culture?
Espoused versus Enacted Values
The literature draws a distinction between espoused and enacted values. Espoused values appear in an
organisation‘s explicit, formal declarations and those
of the organisation‘s senior management. Enacted
values are evident in organisational practices; they
shape the lived reality for all those within an
organisation. Gaps between espoused and
enacted values may arise because: (1) senior
management may not be consciously aware of the
enacted values of an organisation; or (2) espoused
values may reflect an attempt to shape perceptions
of stakeholders rather than directly describe
current reality. Enron is often used to demonstrate
the difference between espoused values (such as
Communication, Respect, Integrity and Excellence)
and enacted values (where overriding
management controls, such as the credit policy)
became common practice (Free et al., 2007).
Organisational Culture as a Control Mechanism
Culture is a mechanism for control. Employee behaviours are shaped through regular communication of
values and having those values reflected in behaviours that are selected, developed and rewarded.
Culture can create a sense of identity and belonging among an organisation‘s members, and these
feelings of identification and belonging can encourage commitment to the organisation. Shared values
and practices enhance social system stability by avoiding potentially disruptive conflicts of interest.
9
It should be noted that the focus of the current review is organisational culture, and as such, influential models of national culture,
such as Hofstede (2003), are not discussed here. Hofstede has explicitly argued that his dimensions are not appropriately applied
to organisational culture but despite his arguments, his dimensions appear in models of organisational culture such as the GLOBE
model discussed below.
34
Organisational Culture and Leadership
Culture is intimately associated with leadership. The initial culture of young organisations is shaped by
the founding leaders who demonstrate their values in the early selection, development and reward
practices of the organisation. These practices then shape the selection, development and reward of
future leaders in the organisation. Hence, an organisation‘s culture and leadership can become self-
reinforcing. If an organisation‘s culture is perceived to be maladaptive and needing change, such
transformation can be achieved in a couple of ways. The most outwardly dramatic and disruptive process
is the replacement of senior leadership with managers who have the desired values and behaviours.
This is quick and can be very effective. A less disruptive but also slower approach is to change the
selection, development and reward practices to reflect the desired values. This may entail, for example,
selecting people who are creative and willing to challenge if a more innovative culture is desired.
2.2.3. Models and Dimensions of Culture
The literature includes a wide range of dimensions of organisational culture. While no single model of
culture has widespread acceptance, substantial commonality allows for an efficient summary of the most
prominent dimensions. Table 4 presents three of the most prominent models of organisational culture,
with the dimensions in each model listed in separate columns. We present the table so that dimensions
that are similar across the different models appear in the same row. The four dimensions of the
Competing Values Framework, which we present in simplified terms, efficiently summarise the
dimensions . The model contains content related to:
1. Management control and stability (as indicated by the dimensions in the ?control orientation?
row);
2. Achieving outcomes (?results orientation?);
3. Caring and collaboration among staff and management (?people orientation?); and
4. Innovation and responsiveness (?change orientation?).
The efficiency of the Competing Values Framework enables briefer assessment and easier
communication than do the alternative models, while nevertheless providing a robust and popular tool for
action-planning. Therefore, we have chosen to use it for the current project.
35
Table 4: Dimensions and Similarities of Three Major Models of Organisational Culture
Competing Values
Framework
(Quinn & Rohrbaugh, 1981)
Organisational Culture
Profile
(O’Reilly et al., 1991; Sarros et
al., 2005)
GLOBE
(House et al., 2004)
Control
Orientation
(Ensure)
Internal Process Stability
Power Distance
Uncertainty Avoidance
Results
Orientation
(Exploit)
Rational Goal
Performance Orientation
Competitiveness
Performance Orientation
Assertiveness
People
Orientation
(Engage)
Human Relations
Supportiveness
Recognition
Social Responsibility
Collectivism
Humane Orientation
Gender Egalitarianism
Change
Orientation
(Explore)
Open Systems Innovation Future Orientation
Figure 1 overleaf presents an adapted version of the original model of Competing Values Framework,
showing the two axes theorised to underlie the four cultural orientations. With regards to the vertical axis,
Quinn and Rohrbaugh (1981) originally proposed that organisations differ such that some are more
organic, flexible and empowering (top half of the diagram), whereas others are more mechanistic,
ordered and goal-focused (bottom half of the diagram). On the horizontal axis, the model proposes that
organisations differ such that some are more externally focused, innovative and ambitious (right-side of
diagram), whereas others are more internally focused, stable and participative (left-side of the diagram).
The four orientations also reflect the evolution of management science discussed in section 2.1.2. Thus,
while early 20
th
century management focused upon ?control? and ?results?, the Human Relations
movement emphasised the impact of employee needs upon organisational performance (reflected in the
?people orientation? quadrant). Since the 1970s, there has been increasing recognition of the critical role
of change and innovation. In this regard, the model also reflects the move from transactional to
transformational leadership, with the older transactional styles of leadership reflected in the bottom-left
(mechanistic/internal) of the model whereas the newer transformational leadership appearing in the
upper-right (organic/external) of the model. Youngblood (2000) described these contrasting older and
newer cultures as ?classic? and ?quantum? respectively. Yet, high performing firms may well need a
combination of all of these cultures since they have to focus on exploiting existing resources for the
present as well as plan for the future.
It is thus important to recognise that no organisation fits perfectly into any one of the four quadrants in
Figure 1. All organisations vary in the extent to which they direct their focus across the four competing
quadrants, with all organisations inevitably and necessarily showing some elements of all four quadrants.
36
Figure 1: Competing Values Framework: Four Cultural Orientations
Source: adapted from Quinn and Rohrbaugh (1981)
2.2.4. Impact of Organisational Culture on Organisational Performance
There are logical connections between the four cultural orientations in Figure 1 and organisational
outcomes of innovation, productivity, engagement and fairness. Innovation is clearly most strongly linked
with the change orientation; productivity can be expected to be most strongly associated with the results
orientation and, perhaps, also the control orientation. Finally, we would expect employee reports of
engagement and fairness to be strongest in organisations with a strong people orientation.
Large scale empirical research on the impact of organisational culture on firm performance is sparse and
much that has been done is qualitative and anecdotal rather than quantitative. The empirical evidence
that exists suggests that linkages between organisational culture and organisational outcomes are
greater when outcomes are expressed with greater specificity. For example, studying 226 US
manufacturing firms and using the Competing Values Framework, Xingxing et al. (2010) found that
different aspects of quality management are associated with different cultural orientations. Having a
people orientation is most closely associated with quality of supplier relationships, whereas a results
orientation is more strongly associated with quality of customer relationships. Somewhat surprisingly,
neither the control nor change orientations show strong relationships with the measured quality
outcomes.
Mechanistic
Organic
E
x
t
e
r
n
a
l
I
n
t
e
r
n
a
l
PEOPLE
ORIENTATION
(“Engage”)
CHANGE
ORIENTATION
(“Explore”)
CONTROL
ORIENTATION
(“Ensure”)
RESULTS
ORIENTATION
(“Exploit”)
•Flexible
•Creative
•Visionary
•Caring
•Empowering
•Collaborative
•Hard-working
•Goal-focused
•Ambitious
•Controlled
•Ordered
•Stable
T
r
a
n
s
f
o
r
m
a
t
i
o
n
a
l
T
r
a
n
s
a
c
t
i
o
n
a
l
37
This study examines the extent
to which participating firms
have a change orientation
(‘explore’) culture that strives
for innovation and
responsiveness. The study will
assess the possible impacts of
such an orientation on firm
performance.
In an informative study examining the relationship between leadership style, organisational culture and
innovation, Howell and Avolio (1993) studied 78 managers across 78 firms and found that a
transformational leadership style only translates into innovation in organisations with a change
orientation. When cultural support for innovation is lacking, then transformational leadership behaviour
has no effect upon innovation. Similarly, studying 50 Taiwanese electronics and telecommunications
firms, Jung et al. (2008) found that cultures with higher change, people and results orientations, and with
lower control orientation, are all associated with innovation and facilitate the effect of transformational
leadership behaviour.
The Society for Knowledge Economics (2008) reported a case
study demonstrating Microsoft Australia‘s adoption of a
stronger people orientation and results orientation. Microsoft
Managing Director, Tracey Fellows, described the
organisation as moving from a Victim-Knower culture
(characterised by lack of accountability and unproductive
debate) to a Player-Learner culture (characterised by
increased individual responsibility and a greater willingness to
listen and learn from fellow employees). Tangible results associated with the culture change included
increased customer satisfaction and exceeding revenue growth targets.
Given discussion above, primary research questions for the current project include: (1) what impact do
different cultural orientations have upon different organisational outcomes within an Australian context?
and (2) to what degree is it necessary to align leadership styles and cultural orientations so as to
maximise organisational outcomes? With a particular focus upon innovation within Australia, (3) to what
extent do Australian organisations have a change orientation and what impact does such an orientation
have upon firm performance?
2.2.5. Culture Strength, Fit and Adaptation
Researchers have also investigated the extent to which these values and practices are common across
all employees (culture strength), there is consistency of purpose across all values, strategy, and practices
(culture fit), and the way cultures change over time (culture adaptation). An organisation demonstrating
high culture strength has a high level of consistency of that culture within and between different units and
departments. An organisation demonstrating cultural fit is one in which values and practices are clearly
linked with the overarching mission and objectives of the organisation. Finally, an organisation showing
adaptation demonstrates that, regardless of current strength and fit, it is able to respond effectively to
changing market conditions.
38
Culture Strength
Several writers (e.g., Gillespie et al., 2008) have argued that high organisational cultural strength may
predict performance because consistency of purpose and practice throughout an organisation will result
in a more efficient and focused allocation of resources. In contrast, others have argued that high cultural
strength may reflect excess adaptation to one set of goals at the cost of the capacity to adapt to an
alternative set of goals should environmental and economic circumstances demand such a change (e.g.,
Wilderom et al., 2000). There is, unfortunately, limited sound empirical research on this topic, but that
which exists suggests that the quality of culture – how well an organisation performs on each of the
above-mentioned dimensions of culture – is more important than the strength (consistency within and
between groups) of the culture (see Saffold, 1988).
The current project could contribute to our understanding of the impact of culture strength by examining
the level of variance in culture scores obtained from the managers and employees within each
participating organisation. Using a measure such as the standard deviation in culture scores within each
organisation, the project could examine whether low variance (indicating high culture strength) or high
variance (indicating low culture strength) better predict organisational outcomes such as productivity,
innovation, engagement and fairness.
Culture Fit
There is strong theoretical and anecdotal support for the importance of cultural alignment. This line of
argument suggests that the particular culture of an organisation should reflect the market conditions and
the strategic goals of the organisation. For example, an organisation in a stable and monopolistic or
oligopolistic market may achieve the most effective allocation of resources with a culture that has a
strong control focus. Conversely, an organisation which perceives its environment as rapidly changing
may more effectively allocate resources using a culture that has a strong change focus. The current
project could test such propositions by comparing the impact of culture upon performance for
organisations of varying sizes or industries. We would hypothesise, for example, that a control orientation
would be associated with higher performance for larger organisations with a substantial market share in
stable markets, whereas a change orientation may be associated with higher performance for smaller,
younger organisations in rapidly changing markets.
Culture Adaptation
While the concepts of cultural strength and fit may be useful in explaining differences between short- and
medium-term performance of firms, they do not explain why some firms with strong cultures manage to
adapt to sustain long-term high performance and others do not. Regardless of the strength or fit of an
existing culture, changes in market conditions may turn what were previously progressive cultures into
ineffective ones. Increases in competition, emergence of new technologies, changes in government
legislation – among many other rapid or subtle market changes – may nullify previously successful values
and practices. Hence, some authors have argued that only cultures that help organisations anticipate and
39
adapt to environmental change will demonstrate high performance over the long-term (Collins, 2009;
Collins & Porras, 1994; Kotter & Heskett, 1992). Adaptive cultures encourage risk-taking, initiative,
innovation, problem identification and problem solving. This adaptive perspective does not emphasise
change in any particular direction, but rather stresses the need to adapt corresponding to changing
market conditions. Using a sample of over 200 blue-chip companies across 22 industries, Kotter and
Heskett (1992) concluded that organisations that were effective over the long-term initiated change in
strategies and practices wherever necessary to satisfy the legitimate changing interests of all
stakeholders including shareholders, customers and employees. This study measures firms‘ flexibility and
responsiveness to change using Barringer and Bluedorn‘s (1999) scale of planning flexibility.
2.2.6. Concluding Summary
?Culture? refers to the values and practices shared throughout an organisation or work group. Culture
acts as a control mechanism, encouraging certain behaviours and discouraging others. Several types of
culture can co-exist. We propose using the Competing Values Framework (Quinn and Rohrbaugh, 1981)
given it provides a practical, efficient and scientifically robust model. This model proposes four primary
cultural orientations focused respectively upon control, results, people and change. In this study, we will
assess the dominant cultural orientations of participating firms and report on the the cultures that show
the highest level of firm performance. There is also an opportunity to examine whether different cultures
are more suited to different types of organisations (by different sizes, market conditions or sector).
2.3. Human Resources Management
The goal of HRM is to assist an organisation meet strategic goals through attracting, engaging and
retaining a high performance workforce (Gomez-Mejia, Balkin & Cardy 2001). In this section we review
the HRM literature showing that the methods used by a firm to manage its human resources can have a
substantial impact on many organisational outcomes including productivity, innovation, fairness and
employee engagement (Arthur, 1994; Delaney & Huselid, 1996; Huselid, 1995; Huselid, Jackson, &
Schuler, 1997; Lawler, Anderson, & Buckles, 1995; Nikandrou & Papalexandris, 2007; Ahmad &
Schroeder, 2003; Macky & Boxall, 2008; Green et al., 2009; Cogin & Williamson, 2010). An evaluation of
how an organisation can realise these benefits through bundles of HR practices is given as well as the
current state of HR in Australia.
2.3.1. HRM and High Performing Workplaces
Although the HRM functions in some organisations concentrate on operational issues, a growing number
of firms are pursuing a high performing workplace strategy (Lawler & Mohrman, 2003) that requires a
more strategic focus. Boxall (1998) suggests that HRM contributes to creating a high performing
workplace by providing a human capital advantage and an organisational process advantage. Human
capital advantage results from having better employees than competitors. This suggests that attracting,
40
This study examines the impact of
strategic and technical HRM practices
on firm performance.
Some examples of strategic HRM
practices include talent management,
building a flexible workforce and
creating a culture aligned with strategy.
Technical HRM activities relate to the
day-to-day delivery of people
management basics such as
administering benefits, maintaining
market-based salary grids, grievance
handling mechanisms, hiring entry level
employees and providing basic skills
training.
engaging and retaining the best employees is vital. Organisational process advantage comes from having
more effective ways of working than competitors, often gained through multiple HRM activities such as
aligning people to goals and values, creating effective working relations between individuals and teams,
collaboration, training, effective skills utilisation,
mentoring and an efficient human resource information
system.
Some researchers suggest that HRM should be viewed
as a central force in the development of distinctive
capabilities that help to create a high performing
workplace (Karami, Analoui & Cusworth, 2004). This
standpoint suggests that high performance comes
through the ?unique? blend of competencies,
knowledge, systems and resources on which an
organisation can draw (Barney, Wright & Ketchen,
2001). Further, tacit knowledge – such as
undocumented customer characteristics or preferences
– and social capital, developed through relationships with
key customers, stakeholders and within organisations which are held by employees, are hard to imitate
by competitors especially when skills are highly specialised and scarce (Coff, 1997; Colbert, 2004).
The next section reviews the configuration HRM needs to adopt to build high performing workplaces.
2.3.2. Reorganising HRM activities to create a high performing workplace
There is a growing body of evidence that HRM plays an important role in creating a high performance
workplace when more traditional operational HRM activities are handled by line managers, employees –
using robust self-serve technology - or outsourced. This allows HRM professionals to pursue more value-
adding roles which increase productivity levels and foster innovation and employee engagement (Barney,
et al., 2001). Although HRM is a functional specialist area, these organisations establish HRM
professionals as advisors and consultants, and not necessarily implementers (Wright, Snell & Dyer,
2005). In this context, it is likely that line managers are responsible for HRM policy execution. Boxall and
Purcell (2008) support this view, stating that line managers are regularly exposed to HRM issues, usually
hiring their own team and being held directly accountable for the performance of that team. In larger
organisations, there may be an HRM department equipped with specialist skills in such technical aspects
as the design of selection processes, formulation of policies, employment negotiations and training needs
analyses (Lawler & Mohrman, 2003). There may also be external HRM consultants contracted to provide
41
such important services as executive search, or assistance with major changes in performance
management and reward systems.
In the context of creating a high performing workplace, we adopt the view that HRM is an aspect of all
management jobs and not the exclusive property or responsibility of HRM professionals. It concerns the
behaviours and actions of all people managers. Therefore, the acronym ?HRM? refers to the totality of an
organisations‘ management of work and people and not simply to those aspects where HRM specialists
are involved. We now turn our attention to specific HRM responsibilities that enhance productivity,
innovation, fairness and engagement.
Huselid, Jackson and Schuler (1997) contrast technical HRM functions like recruiting, selection,
performance measurement, training and the administration of compensation, with strategic activities. A
strategic approach involves designing and implementing a set of internally consistent HRM practices to
support organisational innovations regarding corporate culture, team-based job design, building a flexible
workforce, succession planning, employee empowerment and talent management. Their study
investigated the impact of these different HRM activities on 293 U.S. firms. Results show that strategic
HRM activities are related to productivity, cash flow and market value of a firm. While technical HRM
activities are not directly related to firm level performance, these activities are still essential for
operational efficiency and employee commitment (Huselid, et al., 1997).
In support of this argument, Brockbank (1999) suggests that HRM provides a firm with a competitive
advantage when HRM activities operate at a strategic level (both proactively and reactively). For
Brockbank, strategic level HRM activities include creating a corporate culture of creativity and innovation,
managing change, facilitating a merger or acquisition, linking internal processes and structures with
ongoing market changes by developing technical knowledge, tactical skills and a culture consistent with
the demands of the business strategy. Brockbank (1999) also notes that a company needs to effectively
carry out operational level duties, even if these do not add value to an organisation. Those operational
HRM activities include the routine, day-to-day delivery of the HRM basics such as administering benefits,
maintaining market-based salary grids, grievance handling mechanisms, hiring entry level employees and
providing basic skills training (Brockbank, 1999).
In another study, Nikandrou and Papalexandris (2007) studied HRM practices that distinguished top-
performing firms from others during mergers and acquisitions. They found similar results and report that
successful companies are distinguished by the involvement of HRM in strategic decisions, development
of organisational capability through training and development activities, devolution of HRM activities to
line managers and creation of career and promotion paths within the organisation.
42
In a large Irish study, Flood et al. (2008) examine high performance work systems in medium to large
companies in the manufacturing and services industries. They set out to investigate the nature of
management and workplace practices in Irish-based private sector companies and to explore how such
practices are related to business performance outcomes. The study recommends that any company
aiming for high performance should adopt strategic HRM activities to foster innovation and productivity.
Flood et al. (2008) also found that the use of strategic HRM (as opposed to technical HRM) varies
significantly depending on the nature of the industry. Companies in the personal services sector reported
most extensive use of strategic HRM activities (64 per cent) while those working in health services have
the least extensive use (only 36 per cent). The use of strategic HRM activities was also linked with
workforce size. Companies with more than 500 employees are more likely to utilise strategic initiatives
than companies with fewer employees (58 per cent versus 45 per cent).
Scholars of strategic HRM point out that if a firm wants its HRM function to add value, it has to reorganise
that HRM professionals become full strategic partners within the business, responsible for achieving
strategic goals (Mabey & Salaman 1995). Essentially this means HRM being at the strategy table and not
on it. While this sounds reasonable, if managers responsible for implementing such a shift lack the
power, influence or strategic skills to make this happen, this will inhibit change (Lawler & Mohrman,
2003). A further challenge may be that the corporate culture of a firm has historically viewed HRM as a
support service department, engaged in only technical HRM activities. This makes the evolution of HRM
to strategic business partner more difficult (Brockbank, 1999; Ulrich, 1997).
2.3.3. Current State of HR in Australia
In Australia, a more strategic approach to managing people is a key factor differentiating HR of this
century with the last. Patrickson and Hartmann (2001) suggest that the paradigm shift has been driven by
the necessity for HR to contribute to corporate objectives. Flexible structures where project teams form
and disband as required either on one site or as virtual structures have been central to delivering value
(Patrickson & Hartmann, 2000). In an examination of HR in Australia, Walsh (2001) found that more
flexible working arrangements and hiring practices, investments in HR information systems and improved
understanding on measuring performance at the company, team and individual levels were key in
aligning HR strategy with corporate strategy and features of Australian HR practice (Walsh, 2001).
While recognising some advanced capabilities of HR in Australia, Patrickson and Hartmann (2001) go on
to conclude that there has been little evaluation of the outcomes of HR practice in Australia. In addition,
they state that further development of change management skills is needed. Specifically, assisting staff to
operationalise new strategic endeavours, forecasting skill demand and developing rapid response
systems based on flexible staffing procedures require attention.
43
Others are more critical in their assessment of the HR function in Australia and argue that there has been
low uptake of progressive human resource practices. These have been attributed to the existence of
protected domestic markets and the ?rigidities‘ of Australia‘s centralised industrial relations system
(Walsh, 2001). Indeed, Wright (1995) has observed the tendency of HR managers (who often have a
specialist industrial relations approach) to adopt a legalistic approach to people management.
2.3.4. Preparing the HRM function for the future
In a white paper on future challenges and issues facing Australian HR professionals, Wilson (2010)
reviewed the major trends likely to influence people at work by the year 2020. Wilson (2010) identified
how these challenges would impact workplace structure, performance and HR leadership. For example:
? There will be three very different generations in the workplace for the first time. The needs and
aspirations of Generation X and Generation Y are likely to prove very different from those of the
baby boomers, which have dominated the workplace for the last 20 years. Wilson (2010) also
notes that there had been little progress in the status of women in the professional workplace,
however predicted that successful organisations in 2020 will take on the personal challenge of
bringing talented women into management ranks and keep them there.
? The services economy is likely to globalise (possibly following the path of manufacturing during
the 1980s), creating a major change task and a much more complex management environment.
? A likely long-term structural labour shortage will lead to much more flexible working
environments, more organised to suit employee needs and desires. Flexibility will become the
key to attracting and retaining high calibre staff.
? The obsession with short-term shareholder value, which dominated the last decade, will be
replaced by a much broader perspective on the obligations of a company to a wider range of
stakeholders.
Wilson (2010) outlines four strategic priorities of HR professionals to assist their organisation to manage
its people through a difficult work environment created by the global financial crisis:
Priority 1 – Talent management, including attracting and retention of core talent.
Priority 2 – Maximise staff engagement and communication through a recession.
Priority 3 – An obligation of executives to lead by example in managing down costs of items such
as travel, accommodation, hospitality and ancillary expenditures.
44
Priority 4 – Carefully manage any downsizing.
In the next section, we turn to the research literature to identify specifically how HR practices can
contribute value to an organisation to deliver on these priorities.
2.3.5. High Performance Work Practices
In the HRM literature, a large body of research reports a positive linkage between high performance work
practices and firm-level performance measured by various indicators (Arthur 1992, 1994; Huselid 1995;
MacDuffie 1995; Delaney and Huselid 1996; Delery and Doty 1996; Snell, Youndt and Wright 1996). The
basis for high performing work practices largely comes from the universal perspective. This school of
thought argues that the deployment of a distinctive combination of HRM practices will always result in
superior organisational performance (Delery & Doty, 1996) and that these practices are effective across a
wide range of organisations, at different stages of development, in different strategic contexts and in
different industries (Pfeffer & Veiga, 1999).
The universal approach has appeal specifically to practitioners, who can readily learn from other
organisations or move across companies and business units with a ?tool kit? of HRM practices that are
widely applicable. Early management writers established the platform for this paradigm. Later, Peters and
Waterman (1982) were particularly influential, and the benchmarking/best practice movement has done
much to reinvigorate the popularity of this approach.
How can implementation of specific HRM practices generate such substantial benefits in productivity,
innovation, fairness and employee engagement? Pfeffer and Veiga (1999) argue that the gains occur
because employees work harder due to their increased involvement and commitment which, in turn,
comes from having more control and say in their work. People work smarter because they are
encouraged to build skills and competence, and they work more responsibly because more responsibility
is placed in the hands of employees at all levels in the organisation. Boxall and Macky (2009) explain that
high performing workplaces are first influenced by individual performance which in turn is a function of
interactions between employee ability, discretionary effort and performance opportunities. The authors
argue that the benefits to workers – like participation in decision making, skill development and wage
increases – need to exceed employee investments in their work before workers will be motivated to
upskill themselves and exert additional performance effort when opportunities arise. This is particularly
the case where those employee investments involve work-related stress and work–life imbalance.
The exact nature of the distinctive combination of high performance practices is a matter of debate.
Pfeffer (1998) argued that greater use of 16 management practices (which he later reduced to 7 – see
Pfeffer and Veiga, 1999) results in higher productivity and profit across industries and organisation types.
45
Pfeffer‘s seven universal components include: employment security, selective hiring, self-managed teams
and decentralisation as basic elements of organisational design, comparatively high compensation
contingent on organisational performance (gain sharing, profit sharing, stock ownership, pay for skill,
incentives), extensive training, reduction in status differences and information sharing (Pfeffer & Veiga,
1999). Similarly, Osterman (1994) argued that a number of work practices – such as teams, job rotation,
quality circles and total quality management – result in productivity gains for organisations. Ahmad and
Schroeder (2003) found a relationship between Pfeffer's (1998) seven universal practices and numerous
organisational performance measures across three industries and four countries.
Other studies report evidence linking high performance to HRM practices focused on enhancing
employee commitment via decentralised decision making, comprehensive training, salaried
compensation and employee participation (Arthur, 1992 and 1994). Conversely, HRM practices that focus
on control, efficiency, and the reduction of employee skills are associated with increased turnover and
poor performance (Arthur, 1992 and 1994). Macky and Boxall (2008) examined the relationship between
universal high performance work practices and employee attitudes. They found that high performance
HRM practices have a positive relationship between employees‘ work attitudes (job satisfaction and trust
in management), psychological identification with employers and intention to remain employed with their
organisations. Similarly, Huselid (1995) found that investments in HRM activities such as incentives and
compensations, selective staffing techniques, and employee participation result in lower turnover, greater
productivity and increased organisational performance through their impact on employee skill
development and motivation. Other studies suggest that comprehensive selection and training activities
are correlated with productivity and staff commitment (Terpstra & Rozell, 1993).
In the service sector there is little evidence on the application of high performance HR practices due to
occupational segmentation. A study of aged-care workers in Victoria, Australia by Harley, Allen and
Sargent (2007) indicated that high performance HR practices have positive outcomes for both skilled and
unskilled employees. These findings suggest that high performance HR practices may be applicable in
the service settings.
Most of the recent work on universal high performance HRM practices have found that bundles of
practices have more influence on organisational outcomes than individual practices working in isolation
(Shih, Chiang & Hsu, 2006; Lengnick-Hall, Lengnick-Hall, Andrade & Drake, 2009; Sung & Ashton,
2004). An underlying theme in this research is that firms should create a high degree of internal
consistency, or fit, among their HRM activities. As Baird and Meshoulam emphasise, a firm‘s HRM
activities ?must fit with and support each other? (1988, p. 122) if peak organisational performance is to be
achieved. In a review of HRM developments, Lengnick-Hall et al. (2009) conclude that high performance
46
This study uses Beltran-Martin et al’s
(2008) scale on high performing
workplace practice. This scale
incorporates an assessment of
employee flexibility (functional flexibility,
learning orientation and behaviour flexibility).
The increasing rate of dynamism in
competitive environments means that
measures of employee flexibility/
adaptability are an important
mechanism for explaining the
relevance of strategic and tactical HRM
practices to firm performance.
HRM practices are interdependent processes that should not be considered independently but as
complementary subsystems or bundles.
The logic connecting universal HRM practices and firm performance is intuitively appealing and
supported by theoretical arguments from a number of disciplines. From micro economics, human capital
theory suggests that people possess skills, knowledge and abilities that provide economic value to firms
(Tsang, 1987; Becker, 1975). In other words, increased productivity derived from human capital
investment depends on the contribution of employees to the organisation. A firm will invest in human
capital via HRM activities when these investments lead to higher individual productivity and overall
organisational level outcomes.
Although strong support for universal high performance work practices exists, there are differences
across studies as to what constitutes ?best? practices. In general, the activities identified by Pfeffer and
Osterman (YEAR??) have been labelled high
performance work practices. It is worth noting however,
that positive results in terms of productivity, innovation
and employee commitment appear to be reported
irrespective of the label assigned or of slight differences
in practices (Huselid, 1995; Delaney & Huselid, 1996
Arthur, 1994; Chadwick & Cappelli, 1998; Delery &
Doty, 1996; Ichniowski, Shaw, & Prennushi, 1993;
MacDuffie, 1995; Youndt, Snell, Dean, & Lepak, 1996).
Table 5 includes a summary of the practices prescribed
in the most notable research studies.
Despite the differences in Table 5, several themes emerge
across the studies. We have used these themes to guide the construction of this study. All of the studies
focus on enhancing the skill base of employees or attracting and retaining high performers through
training, job rotation or multi-skilling. Further, most studies promote new organisation designs that
include employee involvement in decision making, empowerment, participative problem solving and the
use of teams. Remuneration, incentives and reward systems also feature across studies as a vehicle for
attracting and retaining employees. In addition, grievance handling, dispute resolution and other
information sharing mechanisms are also prominent (see section 2.5 for more details). Therefore, in
testing whether universal HRM high performance practices contribute to the creation of a high performing
workplace we include a measure of recruitment/selection, developmental performance appraisal,
comprehensive training, competitive pay, participation in decision making, two-way communication and
job design.
47
Enlarging on this point, some scholars argue that organisations do not need to pursue all universal HRM
practices, and that some practices are suitable for some organisations and others are not (Cogin &
Williamson, 2010). HRM practices should vary according to various factors. In other words there will be
numerous factors which moderate the relationship between high performance HR practices and
organisational outcomes.
Beltran-Martin et al (2008) study HRM practices in 226 Spanish firms. Their work is embedded in the
?next generation? of human resource management and offers a deeper study of how and why HRM
practices affect organisational performance. This work is one of the first to examine the intermediate
mechanisms that explain the relevance of HRM practices for firm outcomes, where previous empirical
research has mainly focused on the direct effects between these variables. Specifically, Beltran-Martin et
al. (2008) argue that in modern company‘s proficiency in the performance of a set of assigned HR tasks
is not enough to guarantee competitive advantages. Aspects related to employee flexibility need to be
included in the new job performance standards. To this end, the study assesses degree of employee
flexibility and its impact on firm performance. Employee flexibility reflects levels of functional flexibility,
learning orientation (or skills malleability) and behaviour flexibility
10
. The authors find that HRM practices
mainly exert their influence on firm performance through employee flexibility. They note that ?HPWs no
longer affect organizational performance when HR flexibility has been controlled for? (p.1030). Possibly a
more correct way to say this is that HR practices do not have strong direct effects, but rather they have
indirect effects by influencing the level of employee flexibility, which in turn has a direct impact on
performance. The important point to note is that employee flexibility is one of the variables that contribute
to a deeper insight into the processes through which HR practices positively influence a firm
11
. The study
also illustrates the relevance of creativity and agility in organisational resources for the firm‘s performance
results.
Beltran-Martin et al.‘s (2008) study has practical implications. For example, when HR Managers
implement new people management strategies, they should take into account that employee flexibility
moderates the effect of HRM practices on firm performance. If this is the case, managers are encouraged
10
Functional flexibility assesses whether employees have the current skills and opportunity to switch between jobs and functions
within an organisation. Learning orientation (skill malleability) assesses employees‘ willingness to learn and focus upon continuous
skill development. Behaviour flexibility measures employees‘ ability and willingness to change their behaviour in response to
problems or challenges in the workplace.
11
There are a couple of other important studies that have considered the relationship between flexibility and HRM-performance
linkage (Wright and Snell 1998) and Bhattacharya et al (2005). These paper in particular point to the need to distinguish between
labour flexibility (skills, behaviour etc) and HR flexibility, by which they mean work also points to the ability to change an adapt HR
practices to suit different environmental conditions. In this sense, they are thinking about HRM as a dynamic capability of the firm,
not in the sense of thinking about adjusting workforce arrangements, as the term flexibility is generally used.
It should also be noted that the research focuses on a single employee outcome (HR flexibility) as a mediator variable, thus ignoring
the potential interrelationships between this variable and other relevant employee outcomes, such as employee commitment, skills,
or job satisfaction. All these variables are generally found to have positive effects on performance. This current study broadens the
view by measuring other variables such as employee commitment.
48
to check the design of the human resource strategies implemented in the firm. The most appropriate
approach is to target HR investments towards those practices that have the largest effect on employee
flexibility. Another relevant finding of interest for managers is the need to expand the job performance
concept in the firm by including HR flexibility–related questions, such as an employee‘s ability to engage
in broad, open-ended, and interdependent roles that differ from traditional notions centered on the
effective performance of a set of specified tasks. Aspects such as the provision of new ideas or the ability
to learn should become part of every employee‘s definition of performance. Similarly, there is an
opportunity to consider employee flexibility features when recruiting. This could come through
examination of a candidate‘s willingness to adapt to new circumstances in staffing processes by using
psychological tests or in-depth interviews.
In section 2.10, we review other contingency factors that moderate the effectiveness of high performing
workplace practices and give an example using HRM practices.
49
Table 5: Summary of Universal High Performance HRM Practices
Arthur 1992 Pffeffer & Veiga, 1999 Huselid, 1995 MacDuffie, 1995
Shih, Chiang &
Hsu, 2006
Zhang & Li, 2009 Green, 2009
USA USA USA USA Taiwan China Australia
Manufacturing Multiple Industries Multiple Industries Manufacturing Multiple Industries Pharmaceutical Manufacturing
-Broadly defined
jobs
-Employee
participation
-Formal dispute
resolution
-Information
sharing
-Highly skilled
workers
-Self managed
work teams
-Extensive skills
training
-Extensive
benefits
-High wages
-Salaried workers
-Stock ownership
-Employment security
-Selective hiring
-Self-managed teams
and decentralisation
as basic elements of
organisational design
-Comparatively high
compensation
contingent on
organisational
performance (gain
sharing, profit sharing,
stock ownership, pay
for skill, incentives)
-Extensive training
-Reduction in status
differences
-Sharing information
-Performance
appraisal
-Incentives
compensation
-Job design
-Grievance
procedures
-Information sharing
-Attitude assessment
-Labour /
management
participation in
decision making
-Recruiting intensity
-Training hours
-Promotion based on
merit
-Work teams
-Problem solving
groups
-Employee
suggestions
-Job rotations
-Decentralisation
-Extensive
recruitment and
hiring
-Contingent
compensation
- Status
differentiation
- Training of new
employees
- Training of
experienced
employees
- Team work
- Workers‘
involvement in
problem solving
- Information
sharing
- Performance-
based promotion
- Performance-
based pay
- Team-based job
design
- Comprehensive
training
- Formal training
- Job security
- Extensive
training
- Employee
participation
- Clear job
definition
- Result-oriented
appraisal
- The use of
internal career
opportunities
- Profit sharing
- Job security
-Instilling a talent
mindset
-Rewarding top
performance
-Addressing poor
performance
-Promoting high
performers
-Attracting high
performers
-Retaining high
performers
50
2.3.6. Concluding Summary
Most of the empirical work assessing the relationship between universal high performing work practices have
taken place in manufacturing firms or companies located in the United States (Bae, Chen, David, Lawler &
Walumbwa, 2003). Therefore, this study expands our understanding within an Australian context. The project
addresses the following research questions. First, we examine the impact of strategic and technical HRM on high
performing workplaces. Second, we investigate the effects of high performance HRM practices on productivity,
innovation and employee engagement. We look for individual effects of recruitment, selection, training,
performance evaluation, communication, job design, teamwork and competitive pay as HRM bundles and we
consider employee flexibility as a moderating variable.
We examined the research methodologies of a number of national studies in constructing this study. The National
Irish study on high performance work systems conducted by Flood et al. (2008) and Green et al‘s (2009) study on
Australia which collected data on HRM practices only from senior HRM professionals. Limiting data collection to
HR professionals is flawed as the views of those developing and implementing a HR strategy may be different to
the perceptions of those who experience the outcomes. For instance, HRM staff may believe that performance
evaluations create incentives for certain behaviours (such as high performance) but employees may interpret the
scheme as cultivating competition and inhibiting collaboration. In addition, the information that employees provide
allows for analyses as to whether HRM practices are working in the intended way – through, for example,
fostering innovation, engendering fairness, building commitment and enhancing productivity.
2.4. Organisation Design
2.4.1. Introduction
Organisational design deals with two main issues facing a firm:
1. How the tasks in the production process should be bundled into jobs; and
2. How communication and authority should be assigned to ensure the jobs are coordinated.
The performance of a firm, against a range of criteria – including, productivity, innovation, fairness and employee
engagement – are determined by a firm‘s organisational design and its interaction with the organisation‘s
incentive and performance evaluation practices, the skills and engagement of the firm‘s employees (HRM),
leadership, culture and the external business environment (Saloner et al., 2000).
Organisational design is constrained by two principal factors, dispersed information and bounded rationality:
? Dispersed information occurs because employees, performing various jobs, hear relevant information
about what customers want, prices and products of suppliers, or observe the behaviour of their co-
workers. Sometimes, they just have an idea about how to innovate (Stinchcombe, 1990). Effective
coordination of the firm‘s workers also requires decision-makers to possess as much relevant information
as possible;
51
? Bounded rationality refers to the fact that people have limited attention and limited mental capacity, and
as a result communication and decision making take time and are likely to be imperfect based as they are
on imperfect information (Radner, 1992, Stinchcombe, 1990, Van Zandt, 1998).
We first discuss the general issues surrounding the key dimensions of organisational design. We then review the
development of organisational design in the real world of the last century to see how these issues have played out
and the organisational solutions that have been found. We conclude by discussing a list of specific organisational
design questions facing firms, researchers and policy makers in the 21
st
Century.
2.4.2. Key Dimensions of Organisational Design
Allocation of Tasks into Jobs
As Adam Smith famously observed in the Wealth of Nations (1776), with his pin factory example, an individual
can produce more if they specialize in a narrow range of tasks rather than by trying to do everything themselves.
The reasons being that task specific skills develop more quickly with more frequent practice, greater quantities of
a task justify the extra cost of investment in more specialised equipment/training and switching costs of moving
between tasks are avoided.
In order to produce what people need, the division of labour into specialised tasks has to be coordinated either
through a market or through a firm. If the tasks are fairly independent then market organisation dominates,
however if there are complex coordination problems then the firm is the better method of organisation
(Williamson, 1987).
Firms have to decide how to bundle up the tasks in their production process into jobs. They want to reap the gains
of specialisation but by increasing specialisation, problems and costs of coordination also increase. The costs of
coordinating a large number of tasks include: lack of clear responsibility (Brickley et al.,2007); incentive conflicts
as workers act in their own interests (Hart & Grossman, 1983); delays (Radner, 1992); the extra cost of
managerial time (Radner, 1993), and decision-making on imperfect information (Simon, 1997).
Formal Authority: Levels of Management and Span of Control
The most obvious way in which the task/jobs in a firm are coordinated is through the formal authority structure; in
which a boss coordinates workers by telling them what to do. The problem is, that due to bounded rationality (the
finite cognitive abilities of humans), we are only able to effectively supervise a small number of subordinates. As a
result, we have the organisational design based on ?span of control‘, the number of subordinates who report to a
manager, or workers directly supervised by one. This number varies with the complexity of the interactions being
managed and the importance of speedy decisions, but in practice one person can manage only the smallest of
firms. Anything larger requires additional managers, typically organised into a hierarchy.
The number of levels of management in a firm is simply the length of the chain of command from the CEO or boss
to the ?shop floor? level workers (although in practice this number may not be unique). Span of control is the
52
number of subordinates who report to a manager, or workers directly supervised. For a fixed size organisation the
average span and the number of levels will be inter-related according to the formula
Number of employees = 1 + span + span
2
+ … + span
levels-1
.
Thus, increasing the span of control in a fixed-sized firm reduces the number of levels. In turn, this can speed up
decision-making as there are fewer levels of communication involved in making a decision. The trade-off is that
individual managers increasingly lose control as they become overloaded by larger spans of control.
Organisational Forms
Delegation of authority and the range of tasks controlled are both affected through the choice of organisational
form. At the firm level, larger organisations can make choices about divisionalisation; whether to organise
employees into divisions/departments on the basis of function (accounting versus sales), by product (business
advice versus auditing), by geography, by customer type (small versus large clients) or some mixture of all of
these. The appropriateness of a choice depends on the industry/technology and on a firm‘s product market
strategy. The main empirical finding is that a number of different organisational structures can coexist profitably in
the same industry. One school of thought, Organisational Ecology (Hannan & Freeman, 1989), emphasises the
parallels with biology where a number of species exploit the same resources (industry). At lower levels, or in
smaller firms, there is the choice of basing production on teams or individuals.
Ownership
The ownership structure has also been shown to play a role in the way a firm is managed, in particular with regard
to innovation. There are two main factors at work with ownership effects; information flows/knowledge, and
incentives. There is a large literature on how foreign ownership/foreign direct investment plays an important role in
the transmission of business knowledge which is not widely present in a local economy (OECD Oslo Manual,
2005). At the other end of the spectrum, a small, family-owned business may have quite limited access to
information about even the most generic of contemporary business practices or may have non-profit motives for
avoiding best practice (Colombo & Delmastro, 2008; Bloom & Van Reenen, 2007; Green, 2009).
Integration Mechanisms
As Nobel Prize winner Herbert Simon observed, an organisation cannot hope to deal with all the possible
interactions between all its tasks and its dispersed information. Thus in designing an organisation only the most
important interactions can be addressed through the formal structure. According to Simon‘s (1997, p. 240)
explanation of traditional industrial-era large organisations, ?…division of labour means factoring the total system
of decisions that need to be made into relatively independent subsystems, each of which can be designed with
only minimal concern for its interactions with others.?
Nevertheless, horizontal communication can still be desirable because formal organisational structure does not
negate the existence of important horizontal interactions between employees (Aoki, 1986). Indeed the
desirability of informal horizontal communication and coordination depends on the degree of interdependence
53
High performing workplace
practices are a bundle of
complementary practices that
essentially focus on greater
utilisation of workers through
empowerment rather than
control.
From an organisational design
perspective, the relevant
components of high performing
workplace practices are job
rotation, individual
empowerment, improved
communication and team-based
work organisation.
between activities. Thus, within-team communication will typically be important, and is one of the cornerstone
HRM techniques involved in the high performance workplace approach. It is harder to measure accurately the
informal horizontal communication that occurs between workers at greater distances within a firm (different
departments or even different divisions), across firms or higher in the firm between middle or even senior
management. There is evidence that these communication channels outside the formal hierarchy can have
positive effects. For example, Mendelson (2000) found closer interactions with external stakeholders improved
profitability in fast changing segments of the IT hardware industry (see also the discussion of social capital in
section 2.7).
The Distribution of Talent
In order to maximize firm performance it is typically considered that more able people should be assigned higher
in hierarchies. This applies in a range of contexts; maximizing employing effort (Calvo & Wellisz 1979; Qian, 1994;
Meagher, 2003), solving production problems (Garicano 2000), deciding/implementing new ideas (Prat 1997) or
general management activities (Rosen 1982). The traditional Marxist view was that more/better management
implied more exploitation of workers (Wright & Perrone,1977, Robinson & Kelly, 1979). However recent empirical
finding for Australia (Meagher 2001; Meagher & Wilson, 2004) and the US (Garicano & Hubbard, 2007) imply that
employee wages increase from more/better management.
2.4.3. Developments in Organisational Design: From the Assembly Line to the Knowledge Economy
A Brief History of Organisational Design
Advances in energy production and communication gave rise to the industrial revolution in the 19
th
Century,
ushering in the era of mass production. Workers were readily
available but had low skills in the new technologies. The
combination of low skills and mass production resulted in the first
kind of modern corporation based around Fordism and Taylorism
(Chandler, 1977). Both increased job specialisation and routinisation
and removed autonomy and decision-making from the shop floor to
management.
As job specialisation increases, the range of tasks performed by
each individual worker falls with a corresponding decrease in the
range of skills required of each worker. This tends to make workers
cheaper, because they require less training, and increases their
productivity more quickly as they more rapidly gain experience
through frequently performing the same tasks. In its most extreme
form this approach is characterised by Taylorism in which a firm makes
substantial investments in design of production processes in order to standardise and de-skill tasks
(Stinchcoombe, 1990).
54
Taylorism emphasises the control of workers. There is no need to inform workers about the running of the firm or
to listen to their ideas because firms invest heavily in engineering-based management to deal with factory design
and operations. Management follows the structure of the formal hierarchy with authority concentrated at the top.
The first example of the power of organisational design was General Motors (GM) transcendence of Ford through
Sloan‘s multi-divisional form (M-form). The M-form decentralised the choice of new models to divisional managers
at GM fostering greater innovation and designs closer to the tastes of customers (Stinchcoombe, 1990).
Accelerating technical progress, higher education levels, more demanding consumers, increased international
trade and the beginnings of globalization resulted in an increasingly dynamic and uncertain business world in the
1970‘s and 1980‘s.
As our Introduction explains (section 1.1), new times require new organisational forms and practices. For
example, in the 1980s, the Japanese car manufactures emerged as a major international force. They were able to
achieve lower costs than their US competitors on smaller production runs. They were also more flexible, profitably
switching the production of a factory between different vehicles in response to consumer demands. In this, they
combined lean manufacturing and team-based quality practices.
More recently, the movement to a knowledge-based economy in developed nations has heightened the pressure
on firms to find successful organisational designs. Those seeking to create high performing workplace practices
have experimented with a bundle of complementary practices that essentially focus on greater utilisation of
workers through empowerment rather than control (see also HRM section 2.2.3) . From an organisational design
perspective the relevant components of high performing workplace practices are job rotation, individual
empowerment, improved communication and teams. Training, recruitment and motivation of workers are also
crucial for making these organisational design elements work (as discussed in sections 2.3 on HRM and section
2.6 on training).
2.4.4. Key Aspects of Modern Organisational Designs
Job Rotation and Multi-skilling
A number of problems emerged (Brickley, 2007) from Taylorism's emphasis on narrow specialisation including: (i)
worker boredom resulting in a lack of motivation; (ii) workers focusing only on their own tasks and ignoring the
wider consequences of their actions; and (iii) bottlenecks in which a firm is vulnerable to the behaviour of key
employees located at critical points in the production process who were not easily replaceable. A solution to
these problems, championed by Japanese-style management, is job rotation.
Under job rotation, workers periodically move to new jobs at the same level within the firm. In using job rotation a
firm must balance out the disruption from having a worker learn a new job (and establish new workplace social
networks) with the gains from avoiding boredom and having a more flexible workforce. There is now a
considerable literature demonstrating the value of job rotation as part of a package of modern HR techniques, see
for example Ichniowski, Shaw and Prennushi (1997).
55
The benefits of job rotation go beyond the greater engagement workers experience through more interesting jobs
(Lazear, 1998). Communication between workers is easier when they understand each other‘s roles.
Understanding the bigger picture helps foster innovation. Being trained for multiple jobs in the firm indirectly
fosters innovation by reducing the risk for workers that they will innovate themselves out of a job. Many of these
benefits do not require that workers rotate between jobs, only that they have been trained to perform the other
jobs; multi-skilling.
Individual Empowerment
A flexible production process by definition is not one carefully designed according to Taylorism (so that workers
are derived of all discretion and autonomy). If a firm is to frequently switch its production then workers will have to
be empowered to solve or innovate in the face of the new problems that emerge with each new project. Workers
will be better able to chose the best solution/innovation if they are better informed about what the company is
doing, i.e. more transparency and communication of information down the organisation. As workers become more
empowered and as more mechanistic or bureaucratic production controls weaken, the challenge for management
is to align employee interests with those of the company. Explicit financial solutions include employment security
and profit- or gain-sharing arrangements. All of these changes have the added benefit of making jobs more
engaging for workers; indirectly increasing their motivation (Stinchcombe, 1990).
Self Managing Teams
Coordination becomes more of an issue as workers become more empowered because they now possess a
greater share of relevant information than their bosses. One solution that has become a core element contributing
to high performing workplaces is to group workers into teams that communicate internally and make their own
coordinated decisions (within variable limits). Appropriate incentives, in the form of group-based performance
assessment and remuneration, are important for motivating appropriate behaviour and desired outcome from
workers in these teams (Lazear, 1998).
Boning, Ichniowski and Shaw (2007) report a longitudinal study of production lines in U.S. minimills. They analyse
the adoption of problem-solving teams and group incentive pay and their effects on productivity. While group
incentives are widely used, problem-solving teams are found almost exclusively in lines with more complex
production processes. They found that group incentives increased productivity in all lines, while problem-solving
teams raise productivity in lines with more complex production processes.
This evidence indicates that teams give workers a valuable opportunity to solve problems in more complex
production processes, while standard operating procedures appear sufficient otherwise.
56
In the matrix style organisation,
employees have a permanent
functional boss who overseas their
career progression, training etc as
well as a series of project managers
as they progress between project
assignments (Brickley et al., 2007).
In organisational forms that are
referred to as organic or ad hoc, the
notion of a permanent direct boss
disappears all together and
temporary authority structures
emerge in response to changing
customer requirements and the
needs of each project (Arundel et
al., 2007).
New Organisational Forms
Self-managed teams are just one aspect of organisational forms that have been occurring as part of modern
organisational design. Car manufacturing teams tended to be stable, making incremental innovations, due to the
nature of the production line technology. However in many
service sector industries more flexible project-based teams
work on one off projects. This produces a range of new flexible
organisational forms in which permanent vertical authority
plays a much smaller role in management. For example, in
matrix style organisations, employees report to a permanent
functional boss who oversees their career progression and
training but also to a series of project managers as they
progress between project assignments (Brickley et al., 2007).
In organisational forms that are referred to as organic or ad
hoc, the notion of a permanent direct boss disappears all
together and temporary authority structures emerge in
response to the needs of each project or changing customer
requirements (Arundel et al., 2007).
Flattening Hierarchies
Increasing the span of control reduces the number of levels and this constitutes the process of ?organisational
delayering? observed over recent decades. This process generally seeks to create more ?agile? organisations that
have faster decision making. Empirical studies have indeed found greater use of flatter hierarchies in more
competitive environments, in which quick action is generally held to be the most valuable.
Colombo and Delmastro (2004) investigated the relationship between the allocation of decision-making authority
and internal aspects of an organisation's structure using a survey of Italian manufacturing firms. Guadalupe and
Wulf (2008) investigate the impact of globalisation on the number of layers between division managers and the
CEO and the number of positions directly reporting to the CEO. Both find flattening as a trend in recent years, and
most strongly in more competitive industries.
If one thinks of innovation as the whole process from having an idea through to implementation, then flattening of
hierarchies should be positively associated with greater successful innovation, not because flatter firms produce
more ideas but because they can implement them more quickly, increasing the likelihood that the innovation will
be successful.
A flatter organisation can also be an indirect sign of greater decentralisation because, everything else constant, a
manager can only handle more subordinates if they are less involved in the details of their subordinates‘ actions.
This means that the subordinates have more decision authority (either formally or in the real sense that their boss
is unlikely to overrule them because the boss is too busy). This kind of delegation should be desirable in firms that
57
This study measures the degree
of (de)centralisation of employee
decision making.
Delegation of authority can
improve firm performance by
speeding up decision making,
reducing delays in customer
responses, freeing up
management’s time, increasing
employee innovation efforts and
engagement levels.
also find delegation to self-managing teams profitable, and a study by Colombo and Delmastro (2008) supports
this prediction.
Delegation of Authority
Delegation has a number of advantages in terms of both firm and employee outcomes, including:
? Relocating decisions to a better informed subordinate. However Prendergast (2002) points out the better
informed subordinate will need appropriate incentives to
utilise their information and there is some empirical support
for this issue (see Nagar, 2002; DeVaro & Kurtulus, 2007;
and Wulf, 2007);
? Speeding up decision-making by (i) reducing delays from
communication since chains of command are shorter (Van
Zandt, 2003, Meagher et al., 2004) or (ii) by freeing up
senior management time to work on time sensitive
problems (Meagher & Wait, 2008);
? Increasing innovation effort by employees since their ideas are
more likely to be implemented (Aghion & Tirole, 1997; Acemoglu et al., 2007; Zabojnik, 2002; and Bester,
2004);
? Employees with more interesting jobs becoming more involved and engaged.
Delegation can also have significant disadvantages:
? Lower level employees do not have the appropriate skills to handle increased responsibility. This can be
solved through expending more resources on training, succession planning and recruitment;
? Poor coordination between different parts of the company;
? Failure to reap economics of scale in decision making (cost savings from applying decisions across
multiple plants), as highlighted by Meagher and Wait (2008).
Meagher and Wait (2008) using comprehensive Australian data find that workplaces that face a competitive
product market are more likely to delegate decisions about major innovations to the workplace, rather than to
centralise decision making to a higher level of the organisation. Similarly, workplaces that export their product are
more likely to decentralise decision-making rights. Delegation is more likely with larger workplaces, on the other
hand, centralisation of decision-making is more likely when there are other workplaces in the organisation
58
A high performing organisation is
one that rapidly responds to
changes and opportunities in its
external environment (such as a
shift in customer needs) by
adjusting its internal activities
and efforts.
This study surveys firms’ capacity
to respond to shifts in external
markets using Barringer and
Bluedorn’s (1999) planning
flexibility scale.
performing the same task, and when the product market is unpredictable. Similar results are found in Acemoglu
et al (2007) for the UK. Unfortunately neither dataset contains good productivity/performance information so it is
not possible to determine the impact of these organisational design choices.
2.4.5. Current Trends: Importance of Agility and ICT Investment
Agility and Responsiveness to Change
A fundamental tenant of strategic management is that both a firm's external and internal environments need to be
considered in an optimal managerial design (Saloner, Shepard, &
Podolny, 2000). Given the world is an ever changing place a large
part of the success of a firm is determined by the effectiveness with
which it makes rapid decisions in response to changing conditions. A
survey of 349 executives from around the world (Glen 2009) found
that 61 per cent rated ?Rapid decision-making and execution? as a
critical trait of an agile organisation – significantly ahead of any other
trait. While a speedy response to most changes in the business
environment will increase productivity, this is especially true in the
area of innovation. Innovation frequently provides the innovator with a
first mover advantage. The first mover advantage can be due to legal
barriers like patents, but even absent patents. Being a first mover tends
to frame consumer perceptions (competitors are copies and not authentic) and generates a base of established
customers who find it costly to switch (Besanko et al, 2009). Importantly, a high performing organisation is one
that rapidly responds to changes in its external environment by adjusting its internal activities and efforts. In this
study, we survey firms‘ capacity to adjust to external shifts using Barringer and Bluedorn‘s (1999) planning
flexibility scale.
The Impact of Information and Communication Technology
The most conspicuous change in most workplaces in recent decades has been the massive adoption of
innovations in Information and Communication Technology (ICT). There is a well-developed body of
macroeconomic evidence indicating that those industries making more ICT investments have seen greater
productivity growth (Jorgenson, Ho & Stiroh, 2003; Oliner & Sichel, 2000).
It has been argued that the failure to adopt the appropriate organisational restructuring associated with IT
investments explains part of the US-Europe productivity gap of recent years. Two firm level studies confirm this to
some degree. Bloom, Sadun and Van Reenen (2007) found that US multinationals operating in the UK do have
higher productivity than non-US multinationals in the UK, and that this is primarily due to the higher productivity of
their IT. Furthermore, establishments that are taken over by US multinationals increase the productivity of their IT,
whereas observationally identical establishments taken over by non-US multinationals do not. Within the valve
making industry, Bartel et al. (2009) found that US firms adopted new IT faster than the UK firms (perhaps due to
59
smaller scale and greater unionisation in the UK). However, once IT and the associated HRM changes were
made in the UK, productivity in UK valve firms was the same as in the US.
Although investments in IT and appropriate organisational restructuring appeared to raise productivity and hence
the well-being of society in the long run, in the short run there will be both winners and losers. Shareholders and
high skilled workers are likely to benefit but low skilled workers are likely to see a decrease in demand for their
labour from the skill-biased organisational change associated with IT investments.
Bloom et al (2009) make an interesting advance by separating the impacts of information technologies from those
of communication technologies. Information technologies that reduce information costs enable agents to acquire
more knowledge and ?empower? lower level agents. Conversely, technologies reducing communication costs
substitute agent‘s knowledge for directions from their managers, and lead to centralisation. Their international
analysis of 7 European countries and the U.S. examines the impact of ICT on worker autonomy, plant manager
autonomy and spans of control. They find that better information technologies (Enterprise Resource Planning for
plant managers and CAD/CAM for production workers) are associated with more autonomy and a wider span of
control. By contrast, communication technologies (like data networks) decrease autonomy for both workers and
plant managers. Section 2.9. will explore ICT and workplace performance in more detail.
2.4.6. Organisational Design and High Performance Workplaces of the Future: What Works at Work?
Organisational design is one of the most conspicuous aspects of any firm – every worker experiences the local
allocation of tasks and authority every day. However, how organisational design can best contribute to high
performance workplaces in an economy increasingly shaped by advances in ICT and operating at an ever faster
pace, is an open question. Our expectations are also more demanding. We want rising productivity but also more
innovation, greater fairness at work, more employee engagement and improved employee wellbeing. There is no
shortage of potential solutions; indeed managers, researchers and policy makers must now sort through a
multitude of ideas to determine which combinations might work best. A comprehensive evaluation is especially
pressing for service industries, which despite being the largest sector in the economy, have been neglected by
research in favour manufacturing.
The preceding review of contemporary developments in organisational design suggests the following list of
organisational attributes whose contribution to performance should be evaluated empirically for the services
sector:
? who reports to whom;
? who makes decisions;
? who do they work with - do they work in teams and how do they work in teams;
? who do they communicate with;
? who they learn from within and across organisational units and outside the organisation;
? speed of decision making;
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? awareness of change in the business environment;
? ability to work with these environmental changes to effect organisational responses or initiatives;
? organisational design to maximise returns on ICT investments, and vice versa.
2.5. Industrial Relations
2.5.1. Introduction: Industrial Relations as a Field of Research and Practice
Industrial relations (IR) concerns the study of the employment relationship, including the dealings between the
management of a firm and its employees. A fundamental assumption of IR is that when labour markets are
imperfect, and when the employment relationship includes conflicts of interest, then one cannot rely on markets or
managers to serve workers‘ interests (and in some cases to prevent worker exploitation). Industrial relations
scholars and practitioners therefore support interventions, institutional and other, to improve the workings of the
employment relationship and to protect workers‘ rights. Such improvements can be approached from a range of
perspectives: economics, sociological, psychological, political, legal and others.
Furthermore, IR stretches from individual decisions – like absenteeism or rostering, through the workgroup level,
and into workplace and organisational-level phenomena. In this, it shares much with overlapping fields such as
HRM and organisational studies (OS) – including organisational leadership, culture and design. In recent years,
many IR scholars have embraced a much greater engagement with the perspectives of these other fields. This
has generated combinations of HRM and IR into ?employment relations? and this approach appears to have
contributed to interpenetration of ideas between the two fields (Boxall & Dowling, 1990; Gardner & Palmer, 1997).
Another central defining element of the IR field is that it accepts, as legitimate, employees having independent
collective representative voice in relation to their world of work, typically through a union and access to collective
bargaining (Kaufman, 2004). In minimalist terms, this has international expression through International Labour
Organization Conventions 87 (freedom of association) and 98 (right to organise and collective bargaining). These
meet notions that the world of work in a modern, democratic society needs to provide mechanisms for expressing
and managing grievances, formulating and channelling employees‘ collective demands over their employment
and their work, and that these need a degree for independence from both employer and the state (McCallum,
2005).
Traditional IR research in the Anglophone world has tended to appear particularly concerned with the regulation of
the employment relationship through unions, collective bargaining, legislation and, in Australia, through systems
of conciliation and arbitration. The resulting IR treatment of high performing workplaces therefore has tended to
be, in some senses, narrower than that in HRM or OS.
Yet, unionisation and collective bargaining have suffered steep declines in the UK, Australia and New Zealand
since the 1980s, and sustained employer hostility and marginalisation even longer in the USA. As well, in
Australia, the tribunals that were, for nearly a century, the focal points of systems of conciliation and arbitration
are, since 1997, pale shadows of their former selves (Dabscheck, 2001). In all these countries, the sphere of
61
union influence through collective bargaining has shrunk to cover the minority of the workforce (Kaufman, 2004;
Bamber & Sheldon, 2007, p. 612-15). A partial exception to this is Australia. Here, an award system – even if
greatly reduced – together with the national minimum wage and other conditions continue to extend elements of
union influence to sections of the workforce otherwise untouched by union membership and activity (Murray &
Owens, 2009). Nevertheless, this influence remains much less than it was before the implementation of the
Workplace Relations Act 1996 (Sheldon, 2008).
For these reasons, IR researchers in Anglophone countries often see the relationship between IR and the high
performing workplace agenda through the lens of its impact or potential impact on unionisation, union power,
collective bargaining and employment rights. This has generated different approaches to those apparent, for
example in many European countries, where unionism and collective bargaining maintain both strong coverage
and enduring social legitimacy, or where legislative or policy-based ?extension provisions? carry collective
bargaining gains that unions make into non-unionised (and non-bargaining) organisations.
Another factor encouraging differentiation is that in many of the non-Anglophone advanced economies, works
councils provide employees with a dual channel of collective voice and representation. By statute, works councils
give employees access to consultation and participation rights that, in the Anglophone world, are still largely the
stuff of advocacy and prescription (Markey, 2002). This also means that how the high performing workplace
agenda does or should interact with IR remains a much more unsettled question in the Anglophone world where it
continues to generate widely diverging interpretations. Later sections will canvas these points more fully. It is first
necessary to discuss briefly the content of those practices that make for an organisation that is high performing in
areas like productivity, innovation and employee engagement.
2.5.2. Management Practices and High Performing Workplaces
In its current use, as for HRM, there is general agreement within the IR field that high performing workplaces
result from some combination of what Bryson et al. (2005, p. 460) define as,
task-related practices, which aim to maximise employees‘ sense of involvement in their work, and human
resource management (or personnel) practices that aim to maximise employees‘ commitment to the wider
organisation. (our italics)
Core areas for management action on the high performance agenda include organisational innovations, such as
autonomous teams, training for multi-skilling and communication skills. These require support from employee
participation practices – like timely information disclosure and problem solving groups – and from employment
practices such as job security, internal promotion and, perhaps, performance-related pay. For Kalmi & Kauhanen,
(2008, p. 431), this can be summarised as ?participation, incentives and skills?. Participation and incentives can
also relate to the idea of workplace fairness, one of the criteria in this study of what constitutes a high performing
workplace.
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This study measures fairness using
Brashear et al’s (2005) scale on
distributive and procedural justice. This
assesses:
1) Organisational fairness in
allocating effort and distributing
rewards (distributive justice); and
2) The extent to which employees are
fairly treated with regards to
procedures and processes
(procedural justice).
Across the fields of IR, HRM and OS, definitions of ?fairness?, sometimes also referred to as ?organisational
justice? are often related to employee perceptions of several components (Parker et al, 1997; Brashear et al,
2005). For the purpose of this study, we focus on distributive and procedural justice, as follows:
a. Organisational fairness in allocating effort (contributions) and distributing rewards (distributive justice);
b. The extent to which employees are fairly treated with regards to procedures and processes (procedural
justice).
According to Fields (2002, p. 163), the literature ?starts from the premise that employees focus on the fairness in
organizational systems in determining their commitment, satisfaction, and intent to turn over.? Employee
commitment and satisfaction contribute to employee
engagement, one of the important variables identified for this
study of high performing workplaces. High levels of intent to
turnover indicate a low performing workplace. The literature
suggests that procedural justice can be more important than
distributive justice in affecting employee organisational
commitment and trust in management. For this study, we
focus on both distributive and procedural justice to assess
this.
Yet, fairness may also include things such as diversity, equal
employment opportunity and female representation in the
workforce, to name but a few. We examine a wider range of such
dimensions in the survey. Iverson and Zatzick (2007) came up with a bundle of 11 practices, in their survey of the
literature, that represent various dimensions of a fair workplace:
? Written policy on OHS;
? Written policy on EEO/Affirm Action (AA);
? Formal training;
? Written grievance procedure;
? Performance-related pay;
? Skills audit;
? Team-building;
? Formal selection;
? TQM;
? Quality circles; and
? Employee welfare schemes.
Clearly, formalisation of policy and practice is important and this coincides with assumptions within the IR field. In
some countries, a few of these practices are mandated under legislation and should thus be routine in
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organisations. They nevertheless qualify for inclusion under the high-performance banner even though a number
of authors (Bryson et al 2005; Godard, 2001; 2004; Kauhanen, 2009) point out that organisational innovation is
the determining characteristic of the practices we should examine. Nevertheless, Iverson and Zatzick‘s list
remains useful. For example, it suggests that some elements open to legislative initiative – such as on OHS,
grievance procedures and EEO/AA – offer the prospect of generating high performing workplaces through
national-level state intervention rather than through awaiting sporadic firm-level activity. That is, societies can
make a choice to seek an economy based on high performing workplaces and take active steps in that direction.
A surprising finding in the research is that many fewer employers have adopted these practices than we might
expect given the sustained popularity of these ideas over several decades. Even among ?adopters?, most have
implemented very few practices and in apparently haphazard ways (Addison, 2005; Bryson, et al., 2005; Graetz et
al., 2002; Godard, 2004; Kauhanen, 2009). When researchers collect individual level data, one finding suggests
segmented employee access to HPWs. White collar employees – and particularly more highly ranked ones or
those doing more complex tasks – have greater access. Finnish data suggest that employees in larger
workplaces and those in foreign owned firms also have greater access. The same is true for those who use
information technology more for intra-organisational communication (Kauhanen, 2009)
It is not clear why there has been so little organisational take-up of the high performing workplace agenda in
Australia. Bray et al., (2005) suggest that it may be the result of management inertia and, in particular, lack of
sufficient strategic focus on HRM (see also Section 3 for a discussion of barriers to implementation). Union
distrust or institutional barriers are other potential explanations. However, as Bray et al. (2005) point out, AWIRS
1995 showed that the IR climate was propitious for the introduction of high performing workplace practices.
Indeed, workplace managers and union delegates interviewed were generally positive and the data suggested
that unions played little role in impeding workplace innovation. Instead the major constraints to innovation by
management were of a financial nature, and came from head office or from government.
There is broad agreement that the introduction of high performance-oriented practices improve organisational
outcomes, like productivity and innovation, through at least one of three avenues:
1. Raising the quantity of employee effort;
2. Increasing the quality of that effort; and
3. Improving work processes.
Greater task autonomy and variety and as well as employee discretion over their work, make for more interesting
work. This should increase motivation and commitment, and hence the quantity of effort. Agreeably collaborative
working arrangements – for example through autonomous teams and problem-solving groups – encourage
sharing of knowledge and improved quality of employee effort. Supportive HRM policies such as job security,
internal promotion and particular reward systems increase employee trust in management so that better work
processes result from improved communication in various directions within an organisation (Addison, 2005;
Bryson et al., 2005). More interesting work, agreeably collaborative working arrangements, supportive HRM
policies and a sense of fairness or organisational justice also encourage greater employee engagement.
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Moreover, there is also consensus, across academic fields, as to the importance of considering the
implementation processes for successful adoption of these practices and their sustainability. Put simply,
managerial adoption of elements of the high performing workplace agenda alone does not guarantee a high
performing workplace. The ways in which implementation takes place matter.
2.5.3. High Performing Workplaces: Can We Identify a Particularly IR Perspective?
There is no particular ?disciplinary? way in which IR researchers (or practitioners) would address ?high performing
workplaces? but there is a greater explicit propensity in IR to consider outcomes or priorities independent of
managerial agendas. Researchers in other fields mostly see management practices, such as information
provision, provision of interesting work, EEO, safe workplaces, work-life balance or greater job security, as means
to achieve organisational ends like enhanced employee satisfaction, commitment and engagement. It is possible
to convert achievement of these goals into quantitative benefits for employers, such as higher productivity or
innovation rates, lower turnover and recruitment costs etc.
For many IR scholars, however, those management practices should be ends in themselves – solely because
employees prefer them. In this, questions of employees‘ own rights and interests and of fairness are central
concerns. And this interest in fairness, from an IR perspective, goes beyond what employers by themselves may
be willing to concede. It centres on regulatory protections for procedural and distributive justice. Where then does
this leave employee-centred goals and management concerns for greater productivity? One influential IR
response is, in the words of Bray et al. (2005, p. 325), that, ?organisational justice and employee voice not only
help to build more cooperative relationships but they also help to build more productive ones as well.? Thus, the
centrality of access to unionism and collective bargaining relies on the fact that they embody two cardinal
elements in much IR research; fairness at work, and employee voice – also often referred to as ?justice?. Here,
justice includes both the distributive and the procedural element. Unions and collective bargaining provide voice
(procedural justice). There is also consistent international evidence that they improve distributive justice for
employees (fairness) in terms of better pay, working conditions and hours of work.
According to Graetz et al. (2002), it is therefore possible to group disciplinary approaches to high performing
workplaces into three categories:
(1) An HRM approach that prioritises investment in human capital in favour of maximum discretionary
effort from employees. In this sense it is ?high commitment?;
(2) An IR approach, which entails collaborating with unions so as to build high performing workplaces
through a mutual gains approach (see below). This involves exchanging productivity gains that come
from high commitment for job security, gain sharing and other benefits; and
(3) A quality management approach – with linked operational aspects. This accounts for the prevalence of
quality circles, problem-solving groups and the like.
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One could argue that the degree to which the IR researchers embrace the notion of high performing workplaces
reflects the degree to which they believe its practices are achievable while compatible with fairness – distributive
justice and voice. Indeed, at least one IR tradition is openly critical of the development of the HPWS idea itself,
considering it to be a trap through which employers weaken unionism and manipulate the trust and commitment of
employees increasingly exposed to unilateral managerial control (Kelly, 1998).
2.5.4. IR and High Performing Workplaces: What can we learn from recent historical experience?
Another very long tradition has looked favourably towards these ideas, contributing, for example, to the
development of formal works councils in northern and western Europe, particularly after World War II. Depending
on the country and the degree of legislative support that they enjoyed, works councils provide forums of
independent employee representation and voice into personnel and organisational decision-making areas that
elsewhere remain under complete managerial prerogative. In some countries, works councils are linked directly to
unions; in others, those links come through union activism in works council elections. In countries like Germany,
Austria, Holland and in Scandinavia, works councils are institutionalised in medium-to-larger firms and provide
avenues for both representative voice and the potential, through policy-innovation, to broaden direct participation
(Markey, 2002). European Union regulations also enshrine a (weaker) works council model for transnational firms
operating across Europe.
One of the flowerings of this larger tradition was the ?industrial democracy? movement of the 1970s and early
1980s. Its proponents advocated, researched and initiated initiatives for humanising work and democratising
workplaces, particularly where that work and those workplaces were narrowly routinised and repetitive, steeply
hierarchical, de-skilled and monotonous. In some countries, industrial democracy was a strategic priority of
unions. In others it came through government initiative or employer experimentation. Collective bargaining and
legislation provides much wider coverage and uptake for these initiatives. Employer initiatives, like that at Volvo in
Sweden, often create deeper and more diverse experimentation, if more short-lived. However, in those countries
with institutionalised support for works councils and other forms of participation, those in favour of more
comprehensive or fundamental change towards greater industrial democracy find it easier to gain traction for their
ideas.
Industrial democracy advocates proposed approaches to create what they considered would be high performing
workplaces. The more institutionally-oriented sought to combine greater union-employer cooperation in
institutional IR with union and collective employee participation in the workplace that could include involvement in
co-managing personnel policy and practice beyond the traditional boundaries of collective bargaining. Expected
outcomes were for employees (and unions) to have a greater say in the design of work and that the work itself
would be more varied and ?enriched?. Those doing it were to have greater autonomy and discretion, whether as
individuals or in teams. Current interest in high performing workplaces clearly reflects the continuing influence of
this tradition.
In Anglophone countries, researchers in this tradition have sought to develop forms of employee participation and
work enrichment in the absence of the sorts of support provided in works council countries. Those advocating
66
combining more cooperative (institutional) industrial relations with more participative workplace practices believed
this would develop greater trust between employers and unions, and employees and employers at work (Lansbury
& Davis, 1980; Kochan & Osterman, 1994).
The industrial democracy movement declined alongside a sharp decline in strike activity from the 1980s and, in
some places, also in union density. There has been much less energy in the Anglophone world in favour of co-
determination. Indeed, during Australia‘s Accord years (1983-96), the industrial democracy agenda merged with
one stressing high performing workplaces under the award restructuring from the late 1980s and then the Best
Practice Demonstration Program of the early 1990s (Gardner & Palmer, 1997; Rimmer et al., 1997). Employer
priorities for functional flexibility captured much of this policy agenda as it combined with union preferences for
multi-skilling and competency-based training qualifications tied to systematic career ladders. Unions moved to the
centre of national policy making alongside a Labor government but gained little influence for themselves or
employees over the nature of work. Job enlargement became more common but jobs were not necessarily
enriched. Employees received more responsibility but often at the expense of autonomy and discretion. The
Coalition government, from 1996 to 2007, was largely uninterested in fostering a high performing workplace
agenda. It believed in fostering particular labour market dynamics from within a legislative and policy regime that
sought to weaken unions and strengthen the hand of employers in relation to now more vulnerable individual
employees (Lee & Sheldon, 1997; Gardner, 2008). ?Workplace reform? and organisational delayering produced
more work intensification and little employee involvement (Watson, 2003).
2.5.5. High Performing Organisations and IR: What can we learn from recent international experience?
Industrial relations research, policy and practice in north and western Europe has continued to more consistently
embrace the sorts of intra-organisational phenomena that reflect the interests of earlier industrial democracy
advocates and contemporary HRM and OS researchers of high performing workplaces. Yet, the vast majority of
studies on this agenda have concerned themselves with Anglophone countries (Kaunanen, 2009). This is of
particular interest as authors, such as Godard (2001, 2004), who have suggested that Anglophone countries are
those least amenable to effective implementation of these high performance-oriented practices, precisely because
the existence of large non-union sectors allows employers to introduce those practices on their own terms and for
their own benefit alone. With no access to unions – and the fairness and voice (distributive and procedural
justice) that they can offer – employees have less trust in their employers.
During the 1990s, in Anglophone countries, there was a great deal of optimism about the benefits to employees
and their unions as well as employers through implementing the high performing agenda. The particular practices
or bundle of practices identified as necessary to create high performing workplaces met the core elements of the
IR perspective as to what contributed to better jobs, better work, better working lives and better employment.
One line of optimism saw opportunities for ?mutual gains? in the interaction of unions and management (Kochan &
Osterman, 1994). This stood in stark contrast to a pervasive picture of employers forcing US unions into
?concession bargaining? as the price for maintaining unionised plants. The idea developed theoretically from the
literature on integrative (or collaborative) bargaining. It relied on two crucial notions: that cooperation would allow
67
Bryson et al (2005) find that a
fundamental prerequisite for
employees’ trust is that they receive
early, full and accurate information
from management about the strategy
and operation of the organisation and,
most particularly, ahead of any mooted
changes that will affect them. The
question of management informing
employees is thus an important one
raised in this survey.
for increased productivity (the expanded pie); and that the parties would share those gains in some relatively fair
way. Both notions depended, in practice, on higher levels of trust between the parties than was mostly apparent in
US industrial relations. This is a problem-solving approach that builds positive negotiation relationships that
engender further trust, openness and a willingness to see the situation from the other party‘s point of view
(Lewicki et al., 2006). From within a (US) legal system that works against unionism, the hope was that employers
would learn that it was in their own interests to develop open and productive relationships with unions. In turn, and
voluntarily, this experiential learning would generate greater employer acceptance and legitimacy towards unions
and collective bargaining.
In the USA, the success of this scenario depended on it
delivering on employers‘ own material wants. It was not a
question of labour rights but of employers finding that
collaboration with unions augmented productivity, innovation
and employee engagement. Emerging research literature
explained how this might transpire. Bryson et al (2005)
summarise it, pointing out the three ways that union
representation can interact with and support the high
performing workplace agenda:
a. Bargaining:
Unions provide the potential to exert monopoly power over labour supply with the purpose of improving wages
and working conditions. While this can negatively affect organisational finances, it also has the potential to
attract and retain better employees and provide greater employee motivation;
b. (Collective) Voice:
Increasing employees‘ collective voice through unions can increase productivity by lowering exits (and related
costs). It can extend job tenures and allow for productivity improvements through additional training and
development. Further, a union as employee voice channel provides useful information and feedback to
management regarding improvements in product, process or other areas; and
c. Agency:
Unions can reduce transaction costs for employers given bounded rationality and information asymmetry by
providing help to employers in managing the workforce through formal and informal agreements.
The mutual gains approach achieved some important headline successes but its diffusion was limited. One major
problem remained the very limited union coverage across US workplaces. Given the historically ingrained anti-
unionism pervasive in employer circles, why would non-union employers seek out unions with which to
experiment with this learning? Another problem was that US capitalism was increasingly in thrall to financial
markets themselves focused on short-term financial results rather than longer-term organisational performance.
Stock markets and company boards applauded and rewarded senior executives for radical cost-cutting, layoffs
and shifting plants from union to non-union states (if not off-shore). Where unions still survived, concession
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This survey measures firm practices
such as:
? Equal employment opportunities
? Flexible working arrangements
? Training
? Wage determination and its
regulatory basis
? Employee shared ownership
? Employee consultation
mechanisms
bargaining rewarded employers‘ competitive behaviour against their employees. If employers have made huge
gains over recent years, they have shared very little with their workforces.
These outcomes generate empirically-based pessimistic or sceptical views regarding the mutual gains agenda in
an environment so hostile to unions. Another more theoretically informed line of pessimism sees poor outcomes
for employees (and unions) from a more structural perspective. It views the whole agenda as a mechanism for
employers to increase work intensification (Ramsay et al., 2000). Despite not directly exploring the link between
high performance-related practices and work intensification, Green (2001) found substantial evidence of recent
work intensification and resulting job-related stress in the UK. As one of his suggestions is that self-managing
teams and team-based targets have contributed to this intensification, it seems plausible to assume that this has
some link to the agenda‘s implementation.
Indeed, as Guest et al. (2008, p. 125), point out for the IR literature, ?Trust lies at the heart of cooperative
industrial relations behaviour … and can be viewed as both an antecedent and a consequence of industrial
relations processes.? According to much of the literature (see Bryson et al., 2005) a fundamental prerequisite for
employees‘ trust is that they receive early, full and accurate information from management about the operation of
the organisation and, most particularly, ahead of any mooted changes that will affect them. The question of
management informing employees is thus an important measure within our surveys.
Another level is consultation mechanisms that legitimise frank feedback from employees. A higher level still is co-
determination through works councils and, as in the case of some industries in Germany, through employee
representatives on the supervisory boards of firms. To this end, Britain‘s New Labour Government has recently
instituted reforms providing for greater information and consultation rights for employees (Guest et al., 2008).
One can also make a strong argument that diffusion of many
crucial personnel-oriented practices appears easiest and most
successful where it has the support of legislation, government
policy or national level collective agreements. As Iverson and
Zatzick (2007) point out, the literature suggests that those
practices include job security, equal employment opportunity,
workplace health and safety, and support for training access.
Arguably, a more current reading would include work/family and
other flexible working arrangements that increase employees‘
intention to stay and commitment to the organisation. Trust is
highest where employees gain rather than lose through productivity improvements. A virtuous cycle is most likely
where job security, desired working hours and real wage levels are least vulnerable to unilateral employer
pressure. This appears crucial to employee perceptions of fairness and for their sense of voluntary engagement.
We therefore ask demographic questions within the HR Manager survey regarding:
? Equal employment opportunity;
? Flexible working time and work/family arrangements;
69
Research indicates that
union membership and
access to collective
bargaining are measures
through which employees
are given voice and
procedural justice. The
survey identifies the breadth
of such practices in the
Services sector.
? Training;
? Regulatory basis of wage determination (awards, national minimum wage, AWA, EBA, common law
contracts);
? Employee shared ownership; and
? Employee consultation mechanisms.
For Godard (2004), IR systems in Anglophone countries allow employers too much discretion to take advantage
of their introduction of high performance-related practices in the absence of legislative or union protections of
employees. The result, as Osterman‘s (1999, 2000) longitudinal work shows, is that US employers are able to
sustain their own high performance priorities despite not sharing productivity gains with employees through pay
increases. At the same time, they exploit the relative powerlessness of non-union workforces or unionised
workforces under stress by stripping away job security through large levels of layoffs and outsourcing. The
message here is that employers, unconstrained by regulation, do not need employee trust to implement and
maintain this version of high performance. Fear can be enough. Cases like these do not meet our definition for
high performing workplaces as they come at the expense of fairness, employee well-being and voluntary
engagement.
Interestingly, Iverson and Zatzick‘s (2007) research, based on Australia‘s AWIRS 1995 national survey, found that
while the introduction of high performance-related practices positively correlated with harsh (??) downsizing, it
also correlated with less harsh forms of downsizing. In firms with those practices, employers chose to use forced
redundancies less and natural attrition and voluntary redundancies more. For those authors, this suggests a
choice to maintain employee commitment in the face of organisational or
market pressures to cut staff. Iverson and Zatzick see this as consistent
with Social Exchange Theory, particularly in its psychological contract
manifestation. They conclude (p. 472) that such workplaces, ?do
downsize, but they do it in a way that attempts to ensure procedural
justice and fairness in the process, as well as maintain employee morale
and effort.? This in turn brought higher productivity. Overall then, this
meets our definition of a high performing workplace.
Another indicator of how different institutional environments affect
strategic choices on both sides relates to performance-based pay. Iverson
and Zatzick (2007) found that, in relation to AWIRS 1995, performance-related pay was not significant. Yet, in US
studies, it is mostly a very significant factor. However, in the US context, unlike in Australia, statutory minimum
wages have long been at rising levels and the vast majority of employees are untouched by the outcomes of
union collective bargaining for rates above those minimal. This allows US employers much more discretion as to
the amounts of performance-related payment they can offer without affecting total pay.
Perhaps the UK currently holds an intermediate position between the USA and Australia in these matters. Bryson
et al., (2005) developed the first UK study that systematically tests the effects of unionisation and the adoption of
relevant practices against organisational productivity and financial outcomes. They used a four-quadrant model
that combines union and non-union firms, and ?high-involvement management? (similar to our high performing
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workplace) and ?traditional workplaces? (ibid, p. 485). Most of their unionised/ high-involvement workplaces were
in the finance sector (60 per cent). The largest number of unionised/traditional workplaces (4 per cent) was in
manufacturing. They found (ibid, p. 485) that the adoption of those practices ?has a positive impact on labour
productivity.? Interestingly, they also found that ?this effect is restricted to unionised workplaces?. High
performance-related practices in the non-union sector had no apparent impact on productivity.
These findings reinforced slightly earlier findings from the UK. Metcalf (2003) had found that non-union
workplaces with more such practices outperform on productivity than unionised workplaces with fewer high
performance-related practices. However, he found that the highest labour productivity came where there is both
unionisation and those practices. Guest and Peccei (2001) found somewhat similar results.
In the union sector, Bryson et al (2005) found that employers shared productivity gains from high performance-
related practices with employees through higher wages without financial detriment to the firm. That is, they jointly
expanded the pie (real mutual gains) and the employees – via their unions – and gained a larger share from that
expansion. For the authors, this suggested that these types of unionise high performing workplaces operate in
high-value added product markets and thus have capacity to pass on higher wage costs (p. 483). Interestingly,
this contrasts with Osterman‘s (1999) findings regarding US employers monopolising the gains from high
performance-related practices. Perhaps there is greater diversity between these two most liberal market
economies than some authors might admit.
Further, Bryson et al. (2005, p. 467) suggest that unions can affect ?whether or not an employer introduces [those
practices] and, if so, which … practices, as well as influencing the operation of those practices after introduction.
… In effect, union bargaining can either lower or raise the costs of … introduction [of such practices].?
Nevertheless, they argue, against the pessimists, that claim the British evidence of increasing use of high
performance-related practices has not come at the expense of unionisation. This again suggests that the
interaction of IR and the high performing workplace agenda in other Anglophone liberal market economies, like
Australia, may be much less negative for employees and their unions than the US-based research suggests. This
is particularly the case for Australia despite legislation that remains strongly discouraging towards union activism
(Fenwick & Howe, 2009; Sheldon, 2008). Instead, the existence of national minimum employment standards
augmented by (modern) awards under the Fair Work Act, 2009, removes some of the options from those
employers who would wish to monopolise gains from implementing high performance-related practices (Murray &
Owens, 2009).
This picture is even clearer if we turn our attention to those European ?social market economies? with very high
levels of union density, such as in Finland and Scandinavia. Unlike the US, Britain and Australia, most European
countries do not have institutionalised non-union sectors. Rather, even in poorly unionised countries like France
or Spain, most employees (and workplaces), despite not being unionised, still come under agreements settled by
industry or even national-level collective bargaining. This removes advantages for employers to shift from
enterprise bargaining in the union sector to no bargaining in the non-union sector. In northern-western Europe,
this is even less of an option (Bamber & Sheldon, 2007).
71
Kalmi and Kauhanen (2008) used Finnish national survey data from 2003 to test arguments from Godard (2004)
that the introduction of workplace innovations in social (or coordinated) market economies would show a more
positive picture for employees. In examining the Finnish data, their expectation was that it would display support
for the optimistic high performance approaches emanating from the Anglophone world. That is, they expected to
find implementation through employee involvement and mutual gains outcomes rather than work intensification
and employer exploitation of high performance-related practices.
For Kalmi and Kauhanen (2008), Finland has a number of comparative advantages that should make for much
more successful engagement with the high performing workplace agenda. Culturally, Finland is a highly
collectivist and high trust society, facilitating for example, implementation of self-managed teams. More generally,
it brings very low levels of employee resistance to the introduction of innovative practices. These deeply held
societal values have also produced a public policy agenda that emphasises quality of working life – via engaged
social partnership – alongside productivity improvement. Furthermore, the legal environment supports direct
employee participation in the design of workplace innovations raising the likelihood that those innovations will
meet employee needs and wants. As well, employment law in Finland prevents dismissals ?without just cause?
(ibid, p. 439), generating high levels of employee job security and removing another area of potential trust breach
by employers.
Finland‘s institutional IR system is based on its stakeholder model of corporate governance. Some 80 per cent of
employees are union members, an apt contrast to the USA or Britain. Centralised collective bargaining (at
national and sectoral levels) produces very wide coverage of collective agreements. As this bargaining is the main
means of adjusting pay, any employer choices to provide discretionary performance-related pay would sit on top
of already high collectively bargained rates. This means that they are more likely to represent genuine sharing of
jointly-generated productivity improvements rather than an internal re-arranging of fixed remuneration budgets.
Moreover, the scope (content areas) of this bargaining increasingly includes questions of work re-organisation, so
that collective bargaining sets ?a mutually agreed framework for the introduction of workplace innovations? (ibid, p.
438). Overall then, the structural context for adoption of high performance-related practices in Finland includes
strong support for collaboration, openness and trust-building between employer and employees, as well as
collective employee voice, bargaining and agency.
Finnish co-determination legislation provides further institutional inducements for trust-building, openness and
collaborative problem-solving. The law makes it mandatory for employers to provide employees with the firm‘s
financial data and to consult with their workforces regarding any major changes in duties, work methods or work
organisation. Crucially, this consultation needs to occur in the planning stages. As well, the law empowers
employees to participate in the implementation of new practices. Overall then, it is clear that the Finnish IR system
– and Finnish society more generally – is highly favourable to the development of the employee trust and voice
over employment and work. Moreover, it would seem to provide particularly strong opportunities for employee
discretion and autonomy over their work and for employers to adopt high performance-related practices.
Kalmi and Kauhanen‘s (2008) results strongly confirm the mutual gains approach for employees in high
performing workplaces. As they put it (p.449); ?The presence of workplace innovations appears to be associated
72
with higher job influence, higher wages, and higher job satisfaction … however, with the exception of information
sharing, all [workplace innovations] were related with high job intensity.? Moreover they found evidence that when
it came to introducing such practices, more is better. Indeed (ibid, p. 453):
The adoption of several innovations is associated with increased job influence, increased job
security, higher wage, lower stress, and higher job satisfaction than in the case where only one or
two practices are adopted. These effects are often fairly sizable and generally larger than the effects
of any individual practices.
Once again, however, partial adoption of high performance-related practices is still better for employees than
working where there are none. Even having only one or two practices in operation increases employee job
influence, job security, wages, and job satisfaction. Among the most positive outcomes are that information
sharing ?has consistently positive implications for employees? (ibid, p. 454), self-managed teams produce mostly
positive outcomes and so too does employer provision of training. Overall, employees working in ?innovative
workplaces? do much better than those in workplaces that only partially adopt such practices. Employees working
in ?traditional? workplaces fare worst. For Kalmi and Kauhanen (2008), this confirms (for Finland) Godard‘s (2004)
hypotheses regarding the advantages of implementing workplace innovations in social or coordinated market
economies.
The sorts of comparative cultural, legal and institutional advantages that Finland‘s employees enjoy mean that the
achievement of high performing workplaces comes about in the most employee-friendly ways. Substantive and
procedural justice, trust, collective voice and the quality of employees‘ working lives are both a means and an end
of reform. Moreover, for those authors, these sorts of highly positive outcomes are available through public policy
choice and action. Indeed, they argue that (ibid, p. 455):
One implication of our results is that government-promoted workplace development programs that
address both employer and employee interests in workplace change [as in Finland] … may have a
significant potential in supporting positive outcomes for both parties.
Our Australian study addresses these insights from the work of Bryson et al. (2005) and Kalmi and Kauhanen
(2008). The focus is on the achievement of high performing workplaces in the most employee-friendly way.
2.6. Training
2.6.1. Introduction
Alongside competition, innovation, investment and enterprise, skills are seen as playing a crucial role in
stimulating productivity growth (Richardson, 2007; Society for Knowledge Economics, 2009). In Australia,
numerous studies encourage increased investment in workplace training to improve the nation‘s international
competitiveness, long-term economic performance and address the ?skills gap? (Richardson, 2007; O‘Hanlon-
Rose, 2008; 2009; Green, 2009).
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The research on training and firm
performance is inconclusive with some
studies casting doubt on the hypothesis
that an increase in training has
anything to do with increases in firm
performance, whilst others find that
training is a powerful predictor of firm
productivity and profitability.
One possible explanation is that high
performance HRM practices are
interdependent processes that should
not be considered independently but
as subsystems or bundles.
It is likely that training only impacts
organisational outcomes in association
with other management practices
rather than in an isolated way.
A number of scholars argue that the success of an organisation depends on the skills and actions of its people
and the way employees are trained and developed. There is a large HRM literature that considers training as a
bundle of high performance practices, with training a dominating element within HRM bundles (see the HRM
section, 2.3). Despite all this, there is only a relatively small body of work that examines the direct impact of work-
related training on measures of productivity, innovation, fairness and employee engagement. In addition, much of
the debate around the ?skills crisis? has taken it for granted that the education and training system simply needs to
produce more skilled workers. There has been little attention given to whether the existing skills of the workforce
are fully utilised or effectively deployed.
The following section reviews this literature. Specifically we ask:
? Do high performing workplaces train their employees more often?
? What type of skills training contributes to high performing workplaces?
? Are the skills of the workforce fully utilised and effectively deployed?
? What occupational groups receive training (coverage) and how much time is devoted to training for each
worker (intensity)? We look for trends and uncover relationships to high performing workplaces.
2.6.2. The Effects of Training on Organisational Outcomes
In a theoretical review of the literature, Frazis and Lowenstein (2005) cite numerous studies which estimate the
effects of training on productivity to be high. Research in Portugal (Almeida & Carneiro, 2008), across Europe
(Pischke, 2005), Germany (Bassanini, Booth, De Paola & Leuven, 2005), France and Sweden (Ballot, Fakhfakh &
Taymaz, 2001), France (Delame & Kramarz, 1997) and Italy (Conti, 2005) all suggests that training makes
significant contributions to firm productivity.
Almeida and Carnerio (2008) provide detailed information on the effects of training, accounting for the direct costs
of educational programs, and found that productivity returns to be substantial at 8.6 per cent. In a study of British
industries, Dearden, Reed and Van Reenen (2006) report evidence
that an increase of one percentage in the proportion of
employees trained is associated with a 0.6 percentage increase
in productivity and a 0.3 percentage increase in wages,
suggesting that the effects of training on productivity are larger
than the effects of training on wages. Dearden et al. (2006) also
strongly argue that the methodologies in the existing literature
underestimate the importance and value of training.
The studies cited above are based on the premise that firms
enjoy a higher level of labour productivity because employees
are able to work more efficiently and effectively because of an
enhanced skill set. Productivity benefits for the firm are passed
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on to employees through higher wages. Thus, many of these studies track the wages of workers who have
received training and deduce that these higher wages reflect the productivity dividend that the firm gains from
investment in training. This approach however, has some problems in that there are many other factors, which
may affect the wages of workers other than training (Smith, 2001). Some studies have attempted to establish a
more direct link by isolating the effect of training.
Lynch and Black (2001) found no significant association between training and productivity when they controlled
for the effects of other variables. Felstead, Green and Mayhew (1997) cast doubt on the hypothesis that high
performing workplaces have anything to do with an increase in training. They found that the main determinants of
training were factors external to the firm, such as new regulations, quality assurance standards, occupational
health and safety and the requirements of professional bodies. Ashton, Felstead and Storey (1995) conclude from
their research in Britain that high performing workplaces developed through training have only been proven in the
United States.
More encouraging results have been found in studies of HRM ?bundles? (see section 2.3). Boxall and Macky‘s
(2009) research indicates that HRM practices (with training a dominating aspect of a company‘s HRM activities)
are a powerful predictor of improvements in firm productivity and profitability. Other studies also report that
bundles of practices have more influence on organisational outcomes than individual practices, like training
working in isolation (Shih, Chiang & Hsu, 2006; Lengnick-Hall, Lengnick-Hall, Andrade & Drake, 2009; Sung &
Ashton, 2004). An underlying theme in this research is that firms should create a high degree of internal
consistency, or fit, among their HRM activities. In a review of HRM developments, Lengnick-Hall et al., (2009)
conclude that high performance HRM practices are interdependent processes that should not be considered
independently but as subsystems or bundles. The rationale for this argument is that all HRM practices impact one
another in some way. This point is best illustrated with an example. Consider an organisation that seeks to
compete via an innovation business strategy. HRM practices (including training) need to be integrated to create
an innovative culture. This may include an HRM information system that captures employee ideas and
suggestions and changes to work arrangements such as implementation of cross functional teams to promote
collaboration and information sharing. Performance pay schemes which often reward employees for doing their
existing job well should be expanded to rewarding employees for thinking of improvements beyond the confines of
their present job and a team collaboration component. Furthermore, the implementation of an innovative culture
often means equipping employees with new skills, such as divergent thinking techniques or problem solving skills.
This in turn impacts on recruitment and selection practices which ought to focus on hiring employees with specific
skills. In this example, training positively affects organisational outcomes in association with other HRM practices
rather than in an isolated way.
Studies on the effects of training investments in Australia are rare, however several scholars provide valuable
insights. Maglen, Hopkins and Burke (2001) studied 30 Australian firms in the retail, manufacturing and hospitality
sectors using firm-level data to make some estimates of returns on training investments and the relationship of
training to other factors in the company such as business strategy and human resource policies. They found that
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in many cases, although not all, training investments led to positive returns for firms, but a critical finding was the
relationship of training to other human resource policies. Testing the notion of the ?bundling? of human resource
practices to achieve greater effects for firms, Maglen et al. (2000) show that training is a critical element in these
bundles and that the returns to training cannot be fully realised unless training supports other initiatives in firms,
such as technological change.
Through a review of over 100 papers on the business practices of thousands of enterprises, Ernst and Young
(1995) found that the economic benefits to companies were greatest when management practices such as
performance development and evaluation were integrated with employee training programs, again suggesting the
value of HRM bundles.
Blandy et al., (2000) studied 41 firms across two industries (hotels and kitchen furniture manufacturers) evenly
distributed across Melbourne, Adelaide, Perth and Darwin to investigate differences in the quantity and quality of
training as well as the effects on firm profitability and productivity. The experiences revealed by the case studies
show that firm returns from training can be exceptionally high, especially for training that is highly specific, rapidly
accomplished, and related to the introduction of new technology or working patterns (Blandy et al., 2000). The
authors describe the case of a company that changed its work culture in a particular department through an
intensive training activity involving all of the staff in the department over a series of weekends. The result was a
25 per cent increase in productivity and a rate of return to the company on its investment in training again in
excess of 500 per cent per annum. The results suggest that the benefits were not limited to particular individuals
who received training but extended to all incoming employees as well (who automatically become inducted into
the new culture rather than the old). As a result, the productivity effects of training to change the work culture are
independent of labour turnover and, hence, are likely to be more profitable than other forms of training whose
effects are cut short if the particular workers who have received training quit (Blandy et al.,2000).
The main findings of Blandy et al.‘s (2000) study include:
? Hours (quantity) of training provided by Australian firms are directly related to:
o Product–market uncertainty and unpredictability. The greater uncertainty, the more training that
was provided;
o Other forms of capital investment (in innovation, physical capital and research and development).
As capital investment increases, so does training expenditure; and
o Involuntary turnover. Firms with lower turnover invested more heavily in training.
? Types (quality) of training given by Australian firms are directly related to:
o The presence of internal labour markets in firms; (an example??)
o Other forms of capital investment by firms (in innovation, physical capital and research and
development);
o Competitive product–market conditions. (an example??)
76
Firms in the services sector earn their
living by exchanging knowledge and
offering problem solving capabilities
to clients.
One of the most important skills for
employees in this sector concerns
interactions with people, including
communicating, resolving customer
problems and working in a team
environment. The survey asks about
the type of training employees
receive, including:
? Communication skills
? Interpersonal skills
? Team building skills
? How to manage people
? Leadership development
? Technical training
? Compliance training e.g. OH&S
? Negotiation skills
? Mentoring
? The profitability of firms is directly related to:
o The quantity and quality of training provided by them;
o Firms paying above market wage rates; and
o Firms‘ difficulties in finding suitable employees.
In the last decade, the literature has moved away from stressing the links between training and higher labour
productivity in terms of wages. It now stresses the importance of training in preparing the workforce to become
more flexible and adaptable, thereby enabling firms to successfully innovate and introduce change.
2.6.3. Generic or “soft skills” versus technical or “hard” skills
As noted above, there is a large body of work that demonstrates a positive effect of training in a range of
industries across multiple countries. However, research on the type of training or skills that create positive
outcomes has mainly been carried out in manufacturing settings or in the United States (Whitfield, 2000; Barton &
Delbridge, 2001; Green, 2009). Studies in manufacturing have found that organisations which are more
productive and innovative have increased the responsibilities of front-line employees and their supervisors by
encouraging participation of employees through delegation of managerial decisions to lower levels (Whitfield,
2000; Barton & Delbridge, 2001). Florida et al., (1998) also found that innovation was fostered in automobile
factories through the promotion of knowledge and organisational learning. Such change created a new work
environment for lower level employees and enforced change to managerial functions (Whitfield, 2000). This
occurred through three dimensions: teamwork, employee involvement, and training (Barton & Delbridge, 2001).
In a review of manufacturing companies in 1992, Snell and Dean reported a trend toward up-skilling factory
employees into knowledge workers who can operate in cross-
functional, problem-solving teams. This trend results in higher
levels of innovation and productivity. Barton and Delbridge (2001)
conclude that to participate effectively in problem solving and
continuous improvement activities, shop floor manufacturing
employees need technical, analytical and planning skills as well as
interpersonal capabilities like communication skills, problem
solving abilities and leadership skills.
Osterman‘s (1994) manufacturing study suggested that training
plays a fundamental role in equipping employees with the skills to
identify and resolve problems, to initiate changes in work methods,
take responsibility for quality, and cultivate high levels of
commitment and job satisfaction. In addition, because employees
and supervisors operate with greater autonomy and influence, high
trust cultures are cultivated. Osterman (1994) found that high
77
performance workplaces required more skills for technical/professional employees and skilled, blue-collar
employees. There was also a distinct difference in the type of skills required. Whilst technical and professional
employees were selected on the basis of their professional competence, blue-collar employees were selected on
the basis of generic or soft skills such as interpersonal attributes and the ability to take on responsibility
(Osterman 1994).
In an Australian study commission by the Department of Innovation, Industry, Science and Research to identify
the determinants of high performance and to benchmark Australian firms against the best globally, Green et al
(2009) found that higher skill levels both at managerial and workforce levels are positively and significantly
associated with the ability to develop and deploy superior management practices. Indeed, Green et al. makes a
persuasive argument that upgrading the skills of managers and shopfloor workers through training and
development initiatives enhances performance within manufacturing firms. Like the other manufacturing studies
reviewed above, Green et al. suggests that increased autonomy at the operational level also enhances
management performance. This is achieved by introducing more flexible management styles, decentralising
decision-making processes and fostering self-managing work environments. This requires the development of
generic skills like people management, teamwork and problem solving in both managers and shop floor workers.
Beyond manufacturing, a number of scholars emphasise the importance of developing both technical expertise
and generic, soft skills to build a high performing workplace. For example, Pfeffer and Veiga (1999) suggest that
cross functional work teams are essential for innovation and superior quality irrespective of the industry. Working
in a team setting requires advanced communication skills and a greater awareness of tasks performed by other
members of the team. These are best developed via training and development (Pfeffer & Veiga, 1999).
Academic research in the service industries regarding the type of training that impacts productivity and innovation
is limited. The service industries are at the frontline of Australia‘s economy and are heavily influenced by continual
changes in customer demand and expectations, an increasingly global market place and rapid technological
change that demands ongoing training. The service sectors also face ongoing demands from customers to
increase integration of product and service offerings (Salonen, 2004). Hence company flexibility and innovation
are a priority for business survival and growth. The labour intensive nature of the service industries means that
the quality of employees‘ skills is a key determinant of industry productivity (Service Skills Australia, 2009). The
question remains though, what skills are needed in the service sectors?
The service industry environmental scan (Service Skills Australia, 2009) draws together intelligence and research
on the services sector. The report highlights existing and emerging trends in the service industry and how these
impact on skills and labour needs. Entry level skills are differentiated from higher level skills for those employed in
the service industries (Service Skills Australia, 2009:18).
Entry level skills
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Employees are the most important asset for a business within the service industries since success largely
depends on the quality of the customer service employees provide. As most employees are in operational jobs,
higher level skills and qualifications are typically low. According to Service Skills Australia (2009) the most
important skills concern interactions with people, for example customer service, communicating and resolving
customer problems and working in a team environment. In addition, technical skills associated with the job are
also crucial (like processing financial transactions).
Higher level skills
A key priority in service sectors is the recruitment and development of leaders and managers who will work
closely with their staff to maximise employees‘ career opportunities, improve engagement levels and reduce staff
turnover. Supervisors and managers need to be equipped with leadership skills to improve motivation, build
teams, and communicate effectively. There is also a continuing need for specialised service sector skills such as
innovations in service delivery, service recovery and strategic planning.
How are skills best developed?
Most of the studies cited above measure training effects by examining formal off-the-job training because of
difficulties associated with studying the quantity and quality of on-the-job training. During on-the-job training
however, workers pick up skills whilst operating alongside more experienced employees. This may be particularly
useful in the service sectors, especially for front-line or entry level staff (Maglen et al., 2001). Effective on-the-job
training requires structuring the workplace so that experienced employees can give support and coach less
experienced staff. A worker may simply ?shadow? or observe fellow employees to begin with and are often given
instruction manuals or interactive training programs to support the learning process.
A number of advantages of on-the-job training have been reported. In her 1995 study, Bartel examined the
personnel records of a USA manufacturing company to estimate the impact of on-the-job training on the
performance ratings of employees. Since all employees underwent an annual performance appraisal/rating
exercise, it was possible to measure the impact of on-the-job training on the performance of individual employees.
The results show that individual workers who received on-the-job training were significantly more likely to receive
increases in their performance ratings in the following year, suggesting a positive effect on job performance. From
the same data, Bartel (1995) calculated that the rate of return to the firm from on-the-job training was in the order
of 35 per cent.
In Maglen et al.‘s (2001) Australian study of retail, manufacturing and hospitality sectors, the majority of
respondents indicated that, ?having the work explained by another person doing the job? and ?being shown by
another person? had contributed to their learning the job, well in excess of numbers who thought formal training
had contributed. Maglen et al. (2001) conclude that the tacit knowledge shared in these one-to-one interactions is
more difficult to develop in formal training.
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Skills utilisation concerns the extent
to which employees fully utilises their
skills and abilities at work.
Research show that employee skills
are underutilised in Australian firms
(Watson, 2008). Maximising the
utilisation of employee skills is crucial
for workplace productivity and may
well be the biggest ‘skills crisis’
Australia currently faces.
The UK Skills Survey 2006 found that
being able to make use of abilities at
work was ranked higher than good
pay by employees. We use Felstead et
al’s (2007) questions from this survey
to ask employees about the
‘opportunities for using their skill and
abilities at work’ and also the
‘opportunities to use initiative’. We
then assess the impacts on
productivity.
Skills may also be developed through the broadening of employees‘ technical skills or increasing the variety of
tasks through job enlargement, which numerous scholars have argued is critical for organisational productivity
and flexibility (Smith, 1997; Eitzen, Panton & Mills, 2004; Cordery, 1989). As an example, a sales assistant job
may be enlarged through multi-skilling to include stock control, new worker training and weekly reporting tasks.
This is likely to enhance productivity since fewer workers are required to perform the same range of tasks.
Flexible task assignment then increases skill utilisation and ensures that employees have less idle time and are
able to assume other tasks to cover absenteeism (Hackman & Oldham, 1980). The degree of overlap of skills and
the high skill levels also makes it possible for a work team to be more flexible in meeting fluctuating market
demand through peak/trough management often seen in service sectors. For employees, jobs are more varied
resulting in increased levels of satisfaction (Hackman & Oldham, 1980; Campion, Cheraskin & Stevens, 1994).
Denton (1992) cites the example of Lechmere Inc., a 27-store retail chain in the United States, who found that
multi-skilling enhanced employee performance and relations. Pay raises were put in place on the basis of the
number of jobs employees learned. Cashiers were encouraged to sell products and sporting goods staff received
training in how to operate forklifts. As a result of multi-skilling training, Lechmere Inc. was able to adjust staffing
needs by rerouting employees, thereby creating a more stable and productive workforce. Pay incentives, along
with the prospect of a more varied and interesting workday, proved to be valuable elements of Lechmere's staff
recruiting.
Despite evidence of numerous positive outcomes for organisations and employees, a few researchers have also
found that many firms underestimate the high costs associated with multi-skilling (for review see Friedrich, Kabst,
Weber & Rodehuth, 1998). Apart from the monetary expenses, in the start-up phase of multi-skilling, the
deployment of team members who are only beginning to learn new skills normally leads to deficits in the team‘s
performance (Griffin, 1991). In helping to resolve the contrary evidence in the literature, Campion and McClelland
(1993) conducted a job enlargement intervention experiment and
report that task enlargement had mostly negative outcomes
including less satisfaction, efficiency, and customer service,
more mental overload and errors. However knowledge
enlargement produced enhanced job satisfaction and customer
service, and less overload and errors.
2.6.4. Skills Utilisation
As reported above, there is a body of research which provides
strong evidence for the development of generic soft skills and
technical specialised skills, however there has been little
research which investigates the relationship between skills
utilisation and productivity. In this report, we argue that training
does not necessarily mean increased skills. While we do not
80
dismiss the value of greater skills acquisition as an input to productivity and innovation, we recognise that
development of appropriate skills and utilisation or deployment of these skills is vital for productivity
enhancements.
The concept of skills utilisation is receiving increasing policy attention. However, most of the academic literature
focuses on skills acquisition rather than the narrower field, skills utilisation in the workplace. As a result, evidence
on the impact of specific skill interventions is limited. In this study we employ the following definition of skills
utilisation adapted from the Scottish Government (2008, p. 2),
Skills utilisation is about ensuring the most effective application of skills in the workplace to maximise
performance. Effective skills utilisation seeks to match the use of skills to business demands / needs.
For the purpose of this report, we suggest that skills utilisation is not merely about ensuring the most effective
application of skills in the workplace. Importantly, it is about giving employees at all levels of organisational
hierarchies the opportunity to use their full range of skills and abilities at work.
The UK Commission for Employment of Skills (2010) similarly explain that skills utilisation is concerned with
maximising the contribution that people can make in the work place, and therefore how well people‘s abilities have
been deployed, harnessed and developed to optimise organisational performance.
In an examination of the extent of a ?skills crisis? in the Australian labour market, Watson (2008) concluded that
the current skills shortage is not large enough to warrant the term ?crisis?. Watson (2008) found that 37 per cent of
employers reported that employees possessed skills beyond what is needed in their jobs and only 5 per cent of
employers have workforces with skill levels below those required. In property and business services, Watson
(2008) found that 25.5 per cent of employees reported underutilisation of skills. Watson (2008) also reported that
between 10 and 20 per cent of employees were working in jobs where their skills were not utilised, while about 14
per cent lacked the opportunity to enhance their skills through work. These figures are much higher among lower
skilled occupations, in low-wage service industries and for the contingent workforce; in fact, Watson (2008) found
an almost linear relationship between occupational level and skills utilisation. As a result of his study, Watson
(2008) claimed that Australia has an over-skilled workforce.
Linsley (2005) found similar evidence suggesting that 30 per cent of Australian workers are overeducated and are
underutilising their skills. Linsley‘s results also showed that about 21 per cent of workers with a degree were
working in jobs which did not require that level of education, while about 46 per cent of workers with a vocational
qualification were in jobs not requiring that level of skill.
If Watson (2008) and Linsley (2005) are correct, then increased training in the service industry is not critical to
raising productivity. Instead organisations need to find ways to effectively utilise skills. Sung and Ashton (2004)
81
describe skill utilisation programs as a complete shift in the way a company approaches skill development. Rather
than simply up-skilling the workforce or simply trying to increase the number of people gaining qualifications, firms
need to link skills to business needs before real improvements to organisational outcomes, such as productivity,
will be achieved. One method for doing this is competency mapping.
Competency mapping involves identifying key attributes and skills for each position and process within a
company. The competency map then plays a role in recruiting, selecting and retaining the right employees
because competencies guide the construction of accurate job profiles. Job profiles make the whole recruitment
process easier since candidates who apply for jobs understand what the position demands and interviewers know
what to look for in applicants. This increases the chance of retention as expectations of the new employee and of
the employer match. As the skills and qualities of each position in an organisation are clearly defined, employees
who aspire to higher levels see a pathway for further skill development, often achieved via training, which is
aligned with the needs of their employer.
Other ways to ensure maximum skills utilisation and enable all employees to fully use their skills and abilities is to
evaluate and explore in more detail the leadership styles and management control systems that allow and enable
this to happen. The Scottish Government‘s (2008, p. 6) literature review on skills utilisation explains that
?leadership and management are the factors that will have the greatest impact on skills utilisation. Three levels of
management will affect skills utilisation: people management, management of the learning acquired and
management of the organisation?.
2.6.5. Access to Training
A related issue in the literature concerns access to training between employees in differing occupational groups.
Analysing data collected in the 1995 United States Survey of Employer-Provided Training, Frazis et al., (1997)
found that training hours allocated to young workers was low but steadily increased with age, before dropping off
significantly for employees 55 years of age and older. In understanding which occupational groups received more
training, Frazis et al. (1997) further stratified groups by education level and wage, and determined that employees
with a bachelor‘s degree or higher were more likely to receive increased training than were their less educated
counterparts. In terms of wage or salary, those in the bottom remuneration quartile received an average of 4
hours of formal training per year, as opposed to 23 hours for those in the top quartile.
In the United States the amount of formal training varies considerably across industries. In general, organisations
in the transportation, communications, finance, insurance, real estate and mining industries provide more hours of
formal training than the average, and firms in retail trade and wholesale trade provide fewer hours than the
average (Frazis et al. 1997). However, the regulatory nature of many occupations in these industries (especially
transport, finance, insurance and mining) could explain this result and was not accounted for in the analysis.
Other evidence from the United Kingdom and the United States showed a strong positive association between the
skill level of workers and their access to training (Gallie, 1991; Brown, 1989; Lynch, 1992; Lynch & Black, 1997).
82
These studies have found that already highly skilled employees increase their skills advantage viz-à-viz the less
skilled and that this has produced a polarization in the skill distribution between management level staff and
employees.
In Watson‘s (2008) study, about 41 per cent of employees undertook work-related training or education in the
twelve months prior to being surveyed. The largest categories of staff undertaking training were professionals and
associate professionals; the lowest proportions were labourers and elementary clerical, sales and service
workers. Watson (2008) provides evidence that business and property services have particularly poor results in
regard to frequency of training as compared to other sectors.
The Australian Bureau of Statistics (ABS) 1997 survey of education and training found that, in Australia,
employees on average receive 16.5 hours of employer-supported formal training in a year — a value that
translates into about an additional year of schooling during an employee‘s working life, and much more for some
workers. The ABS survey of training expenditure found that firms spent 2.5 per cent of their total wages and
salary bill on the training and education of their employees—a total of $1179m, which is a little over 0.8 per cent
of GDP or 15 per cent of total expenditure on education (see Long & Lamb 2001). Smith (2001) estimates the
hours spent by co-workers providing new workers with informal training to be approximately 62 hours per year.
2.6.6. Concluding Summary
In the current economic environment, training is often regarded as a frill or something that needs to be cut to
reduce costs (Karami et al,, 2004). This research project aims to contribute to our knowledge and practice in three
main respects. First, we attempt to ascertain whether there is a positive correlation between training and high
performing Australian workplaces (measured by productivity, innovation, fairness and employee engagement).
We test this effect by isolating training from other HRM practices and then by bundling training with other HRM
practices. Second, we investigate whether this relationship is moderated by effective utilisation of skills. Third, we
report groups who receive training (coverage), the time devoted to training for each worker (intensity) and the type
of training undertaken (category) to detect any trends and uncover relationships to high performing workplaces.
83
A challenge commonly pointed out by
research is the constraints that
management accounting controls can
impose on organisations.
An example is when a strong focus on
conformity to plans and targets
prevents innovation and longevity
(Davila, 2005). Management
accounting controls, if inappropriately
designed or used, can also have
negative implications for staff
involvement in decision making and
the well-being of people at work
(Malina & Selto, 2001).
Furthermore, a fixation on myopic,
short term financial targets can
compromise investments into a firm’s
intellectual capital base, limit its long
term health and create ‘anorexic’
organisations.
2.7. Accountability and Management Accounting Controls
2.7.1. Introduction
Accounting control systems (such as budgets, target, procedures, manuals and plans) play a significant role in
creating high performing workplaces. Accounting controls are often seen to be the ?DNA of an organisation?. They
create visibility and transparency (and sometimes scrutiny), which enable management intervention (Mouritsen et
al., 2001). In other words, what gets measured gets managed
(Ridgway, 1956).
Management accounting controls are defined as ?formal,
information-based routines and procedures managers use to
maintain or alter patterns in organisational activities? (Simons,
1995, p. 5). They are ?socially constructed artefacts (people
design them) that create a very real social context for those upon
whom they are imposed that can fundamentally affect
behaviours? (Berry et al., 2009, p. 15). They are put into place to
achieve organisational objectives (Ansari & Bell, 1991), to
monitor strategy, ensure stakeholder needs are acknowledged
and acted upon, measure performance, and identify and mitigate
business risks (see Berry et al., 2009). Mostly, they act as
?custodians? of business decision making and evaluation
12
. In
some cases, a control has to check the performance of an
employee (such as his or her revenue performance). This is
different to when an actor is making a strategic business decision
drawing, for example, on a net present value calculation or a
customer profitability analysis. In other cases, they have to make sure that business strategies meet
predetermined goals and objectives (Lorange et al., 1986).
Such control mechanisms are critical to lifting firm performance and creating ?high performing workplaces?. In the
following sub-sections, we provide evidence of this. We show how management accounting practices, such as 1)
intellectual capital measurement and reporting, 2) management accounting controls systems (such as budgets
and performance targets) and 3) participative management accounting practices (such as participative budgeting)
affect firm performance and can result in higher levels of productivity, profitability and innovation.
12
As a consequence, behavioural management accounting research has gained increased traction in recent years. Such research focuses on
the behavioural implications of management accounting techniques and the effects of human behaviour and psychology on, for example, the
quality of financial reporting. Hall (2008, p. 141) finds that ?performance measurement systems influence managers‘ cognition and motivation,
which, in turn, influence managerial performance?. The effect is indirect through the mediating variables of role clarity and psychological
empowerment. See also (Lipe & Salterio, 2000; Luckett & Eaggleson, 1991). The key point to note is that management accounting controls
create boundaries for what is valued (and not valued), expected (and not expected), and how decision are made (and by whom). They create
transparency into desired (and sometimes undesired) areas of firm and individual performance. An accounting control can define space and its
organisation and make other elements dependent upon itself (Latour, 1981, p. 286).
84
For the purpose of this review, ?high performing workplaces? are those that achieve high levels of innovation,
employee engagement, fairness and productivity. Contrary to the human resources literature (Huselid, 1995;
Huselid et al. 1997; see section 2.3. for more details), the management controls literature has not widely
embraced the term ?high performing workplaces?. Yet, many accounting studies have examined the relationships
between accounting, innovation, employee engagement and productivity and illustrated the many ways in which
controls create ?high performing workplaces?. In this section, we review this literature and evidence.
A challenge commonly pointed out by research is the constraints that management accounting controls can
impose on organisations. An example is when a strong focus on conformity to plans and targets prevents
innovation and longevity (Davila, 2005). Management accounting controls, if inappropriately designed or used,
can also have negative implications on staff involvement in decision making and the well-being of people at work
(Malina & Selto, 2001). Furthermore, a fixation on myopic, short term financial targets (influenced in part by capital
market investors‘ focus on short-term returns) can compromise investments into a firm‘s intellectual capital base,
limit its long term health and create ?anorexic? organisations.
A high performing organisation is one which understands well the tensions surrounding the design of
management accounting controls systems. It is one which acknowledges that such tensions exist and seek to
maintain a healthy balance between competing objectives, such as:
? A historical and narrow focus on financial outcomes versus a forward-looking focus on intellectual capital;
? The exploitation of current products and services versus exploration of new opportunities and strategies;
and
? A too strong focus on reducing deviations and alignment versus maximising employee involvement and
diversity.
In this review, we discuss some of these tensions. These involve considerations of how accounting controls can
be used to balance individual and collective learning, such as intellectual capital reporting that is used to report
and manage the development of a firm‘s portfolio of knowledge resources (i.e. the resources that embody the
firm‘s knowledge and intangible capital). These tensions also focus on the characteristics of accounting controls in
innovative firms. Some tensions can also be found around the degree of involvement and participation of
employees and middle management in devising strategies and goals. Involvement can provide diversity and
creativity to the development of strategies and goals, but the potential cost is that it can reduce focus and create
confusion. High performing firms are hypothesised to be those that manage and address such tensions.
2.7.2. Intellectual Capital Measurement and Reporting
85
Financial accounts (such as P/L
statements and balance sheets) have
been criticised for focusing too much
attention on financial results setting
aside the intangible value drivers of the
business (such as customer orientation,
human capital, business systems and
processes, stakeholder needs etc.)
This study identifies the extent to
which high performing firms measure
and report on their intellectual
capital, and the effects this has on firm
performance.
Previous research has found that those
firms that measure their intellectual
capital and incorporate such
information into strategy making and
resource allocation outperform those
who don’t (Ittner and Larcker, 1998,
Youndt et al., 2004).
Financial accounts and accounting techniques (such as P/L statements, cash flow statements, balance sheets,
budgets) have been criticised for focusing too much attention on short term, financial results at the cost of setting
aside the intangible value drivers of the business, such as customer
orientation, human capital, systems and processes, and
stakeholder needs (Mouritsen & Boedker, 2009, Boedker et al.,
2005; Fincham & Roslender, 2003; Mouritsen et al., 2003; Lev,
2001; Petty & Guthrie, 2001; Sveiby, 1997)
13
. The balance
sheet does not recognise most intangible assets since these do
not meet the accounting recognition criteria of being
?controllable?, ?identifiable? and ?reliably measurable?. Treating
investments into people, research and development, technology
and process improvements as expenses (rather than assets),
creates a series of problems: 1) it can prevent management
intervention; 2) it means that managers are disinsentivised,
even penalised, for investing in intangibles; and 3) it results in
too strong a focus on short term results. Malina and Selto
(2001) and Luft and Shields (1999) explain that financial
indicators tell a story of how the firm has performed in the past,
but shed few insights into how the firm is positioned to create
value for customers, shareholders and others into the future.
Hence, a focus on financial indicators alone is too narrow and
short-term focused. Fitz-enz (2000, p. 249) describes this challenge as
follows;
The accounting function does a fine job of telling the state of our past and present financial health. But it
says nothing about the future. Additionally, it does not speak to human capital issues. To see the future,
we need leading indicators. These indicators tell us the state of our human capital, as we prepare for
the future.
These problems have led practitioners, academics and others to argue that management accounting practices
need to be modified to incorporate consideration of a firm‘s intellectual capital. Accountants should adopt a more
strategic management accounting approach and focus on the evaluation, appraisal, and measurement of
intellectual capital to avoid neglecting what may be the organisation‘s most valuable resources (Tayles et al.,
2002). Instead of a narrow focus on return on investment and financial measures alone, emphasis is now on
measuring customer satisfaction, product quality, employee satisfaction, market share, and relational capital
(Kaplan & Norton 1996; Otley 1996). Greater consideration of a firm‘s intellectual capital needs to be built into
13
Some researchers also point out that traditional accounting and accounting-based performance management are inappropriate given
today‘s uncertain economic and complex competitive environment (Ballantine & Brignall, 1995; Govindarajan & Shank, 1992; Bromwich &
Bhimani, 1989).
86
performance management, risk management, capital investment, budget and control, and stock market
investment decisions (Tayles & Sofian, 2007).
Intellectual capital measurement and reporting thus offers an extension to traditional financial accounts - one that
broadens insights into business performance and its value drivers. Marr et al. (2003) point out that intellectual
capital is of strategic importance to firms (see also, Grant, 1991, Sveiby, 1997, Stewart, 2001, Andriessen &
Tissen, 2000, Teece, 2000). Indeed, a firm‘s real competitive edge is said to be located in the quality of its
relationships, structures, and people (Segelod, 1998). Hence, measuring and reporting on this aspect of firm
performance is critical to value creation.
The following sub-sections review research studies on the techniques and frameworks that firms can put in place
to manage intellectual capital, and the advantages to firms that do so.
Intellectual Capital Frameworks and Measures
A firm‘s intellectual capital is said to be its invisible resources (Sveiby, 1997). Relations with customers or systems
and processes are not readily visible to the human eye (Boedker et al., 2005). This poses a challenge to
managers and others. When intellectual capital is not readily visible to the human eye or recordable in financial
accounts, it risks being overlooked and under-prioritised from a strategic management perspective.
In the early 1990s, various performance measurement frameworks were developed to overcome the shortfalls of
financial-only measures (Bourne et al., 2000) and increase visibility into a firm‘s invisible resources. Such models
record and report on a firm‘s intangible resources, such as key customers, internal processes, human capital and
learning (Amir & Lev, 1996). Intellectual capital reports make ?the invisible visible? (Boedker et al., 2005). Visibility
in turn means that intellectual capital and knowledge resources become open and amenable to management
intervention (Mouritsen et al., 2001; Mouritsen & Boedker, 2009). Once recorded in accounts of performance
(such as intellectual capital statements), intangible resources become dislocated and transformed from something
internal to the person into something that is the effect of a collective arrangement. Through intellectual capital
statements, the dark, tacit knowing of individuals comes into the open space. What was once internal is now open
and amendable to management interventions (Mouritsen et al., 2001, p. 736). Intellectual capital statements and
measures thus help ensure intangible resources get the management attention they are in need of. Commonly
used frameworks and models include the:
? Intangible Assets Monitor (Sveiby, 1997);
? Skandia Navigator (Edvinsson & Malone, 1997) which was particularly developed with intellectual capital
in mind;
? Balanced Scorecard (Kaplan & Norton, 1996; 2001; Lipe & Salterio, 2000) which had a more general
strategic focus; and
? Intellectual Capital Statements (Mouritsen et al., 2003).
87
Yet, Tayles and Sofian (2007) find that established performance measurement frameworks, such as those listed
above, are not strongly featured across firms (see also Chenhall, 2005; Ittner, Larcker and Randall, 2003)
14
. They
point out that measuring organisational health in terms of customers, processes, relationships and employees
often takes place outside of a formal framework or model.
Hence, future research should focus more generically on the extent to which a firm measures and reports on its
customer relations, employee health, relational capital, business processes, and stakeholder needs. A survey of
1016 company directors by McKinsey Consulting (2005) illustrates the types of information that company directors
are looking for more information about (see Figure 2).
Figure 2: Changing Information Requirements of Company Directors
Facts at a Glance
In order of importance, the 1016 company directors surveyed in the McKinsey survey
wanted to know more about:
1. Market Health
Customer profitability/satisfaction, competitors‘ market share and products,
suppliers, brands.
2. Organisational Health
Employee retention/satisfaction, capabilities and skills, organisational
structure, culture, values.
3. Network Health
Regulatory changes, government policies, public opinion, community views.
4. Financial Performance
Cash, costs, EBITDA, margins, return on capital.
5. Operational Health
Buildings, inventories, patents, product pipeline, production rates.
Source: McKinsey (2005)
The survey also points out that a current lack of information about intangible assets may compromise the ability of
company directors to fully understand the objectives of and risks to their companies.
Impacts and Effects of Intellectual Capital Management and Measurement Practices
A greater focus on intellectual capital management has been said to provide a variety of advantages to
organisations. These include, but are not limited to, greater capacity of the firm to deal with economic uncertainty,
14
This is a point also made by Hall (2009). He states (PAGE #) that ?recent research indicates that the information dimensions of
management accounting practices, such as performance measurement systems (PMS), are not captured effectively by labels such as the
balanced scorecard?. In particular, Ittner, Larcker, and Randall (2003) argue that researchers need to devise improved methods for
determining what firms mean by contemporary PMS.
It should also be noted that Becker and Huselid (1998), Huselid (1995), and Huselid (et al. 1997), argue that systems of nonfinancial
measures, not individual measures themselves, appear to be more reliable determinants of firm performance.
88
Social capital is the resources embedded
within, available through, and derived
from a network of relationships.
A firm can invest heavily in employee
training and education to lift innovation,
yet without the right collaborative
networks, it is less likely to be successful
in innovating.
“Unless individual knowledge is
networked, shared, and channelled
through relationships, it provides little
benefit to organisations in terms of
innovative capabilities” (Subramaniam
& Youndt, 2005, p. 459).
Thus, for a firm to effectively leverage
investments in human capital, it is
imperative that it also invests in its social
capital, including partnerships and
collaborative networks. This study
measures the social capital of
participating forms.
better decision making in strategy formulation and resource allocation, increased profitability, and greater
accuracy in capital market valuations. We discuss these below.
Competitive Advantage
Rapidly changing environments and business conditions suggest a growing need for strategic flexibility. High
levels of intellectual capital assist with this. Respondents in Tayles and Sofian‘s (2007) survey of intellectual
capital in Malaysian firms believed that high levels of intellectual capital helped them cope with economic
uncertainty. This supports the notion that firms rich in intellectual capital – particularly in the form of creativity,
intellectual assets, and relational capital – are better positioned to withstand, and even exploit, the effects of
unanticipated changes in markets and economies. It affirms previous research that a firm‘s real competitive edge
is located in its intellectual capital, including the quality of relationships, structures processes, people etc. (Grant,
1991, Segelod, 1998, Sveiby, 1997, Stewart, 2001, Andriessen & Tissen, 2000; Teece, 2000, Marr et al., 2003).
Strategic decision making and resource allocation
Marr et al. (2003) point out that when formulating a
corporate strategy it is not enough to just identify the
competitive forces, opportunities, and threats of the industry,
as suggested by Porter (1979). In addition, organisations
have to identify their corporate competence. This is most
often derived from intangible resources, such as the quality
of customer relations and human capital, in order to evaluate
opportunities (Andrews, 1971). According to resource based
theory, the question to ask is: does the organisation have
the right competence to pursue certain opportunities?
Andrews (1971) brings the strategic importance of
competences to a head when he states that opportunism
without competence is a path to fairyland.
Thus, a resource and competency-based strategy (Penrose,
1959; Wernerfelt 1984; Rumelt, 1984) is one that requires
visibility of, and investment into, a firm‘s intellectual capital.
Firms with a competency-based strategy are those that
understand well the relationships between intellectual capital, competitive advantage, and profitability (Grant,
1991). These are the firms that strategically identify, measure and invest in their intellectual capital in order to gain
a competitive advantage and increase their performance (Petergraf, 1993; Prahalad & Hamel, 1990; Teece et al.,
89
1997)
15
. What to measure and how to measure it is critical to the strategy formulation and resources allocation
processes. Indeed, what gets measured is often also what gets managed (Ridgway, 1956).
A notable point of differentiation between the intellectual capital literature and the HRM literature is that the former
often takes a broader perspective on the drivers of value creation and performance (see Youndt et al., 2004).
Research, for example, shows that an organisation‘s human capital and social capital in combination affect its
innovation capabilities. A firm can invest heavily in employee training and education to lift innovation, yet without
the right systems, processes and networks, it is less likely to be successful in innovating. Indeed, Subramaniam
and Youndt (2005, p. 458-9) find that, ?counter to our expectations, human capital had a negative influence on
radical innovative capability?. Individual expertise on its own was not conducive to radical innovation. Yet, the
interaction of human and social capital positively influenced radical innovative capability. This indicates that the
value of human capital is strongly tied to social capital. ?Unless individual knowledge is networked, shared, and
channelled through relationships, it provides little benefit to organisations in terms of innovative capabilities? (ibid).
Thus, for a firm to effectively leverage investments in human capital, it is imperative that it also invests in the
development of its social capital, including partnerships and collaborative networks. These provide the necessary
conduits for their knowledge workers to network and share their expertise. This finding has implications for skills
and training providers. The authors (p. 359) conclude that in ?today‘s more network-based organisations and
economy, it may be appropriate to move beyond traditional definitions of human capital that revolve primarily
around educational/functional skills to include competencies surrounding interpersonal interactions and
networking?
16
.
Profitability/Productivity
Said et al. (2003) hypothesise that firms that use a combination of nonfinancial and financial measures perform
better than firms that use financial measures alone. They find that nonfinancial measures are leading indicators of
future accounting-based performance. Yet, they also find that nonfinancial measures do not positively impact on
the current accounting performance as measured by return on assets. Their results are consistent with results of
previous studies, which provide evidence that nonfinancial performance measures are associated with
subsequent firm economic performance (Anderson et al., 1994; Banker et al., 2000; Foster & Gupta 1997). Said
et al.‘s (2003) study also indicates that the use of nonfinancial measures is significantly associated with: (1) an
innovation-oriented strategy; (2) a quality-oriented strategy; (3) the length of the product development cycle; (4)
industry regulation; and (5) the level of financial distress.
15
A practical example of a firm that has realised higher returns from measuring and investing it its intellectual capital is telecommunications
software company APiON, who developed and implemented a growth strategy that harnesses its intellectual capital (Peppard & Rylander,
2001). By investing in its people and customer relations, the strategy allowed APiON to realise a dramatic increase in shareholder value.
16
The authors (ibid, p. 359) go on to suggest that an ?organisation‘s efforts at hiring, training, work design, and other human resource
management activities may need to focus not only on shoring up their employees‘ functional or specific technological skills/expertise, but also
on developing their abilities to network, collaborate, and share information and knowledge.?
90
Ittner and Larcker (1998), using customer and business unit data, find support for claims that customer
satisfaction measures are leading indicators of customer purchase behaviour (retention, revenue, and revenue
growth), growth in the number of customers, and accounting performance (business unit revenues, profit margins,
and return on sales). See also Helmi (1998), and Yeung and Ennew (2001) for related studies on customer
indicators.
Youndt et al. (2004) examined intellectual capital in 208 firms. They researched how investments in (HRM),
information technology (IT), and research and development (R&D) provide differences in financial returns
17
and
Tobin's q
18
. Results indicate that a relatively small group of superior performing organisations exhibit high levels of
human, social, and organisational capital
19
. Most firms, however, tend to focus primarily on only one form of
intellectual capital, and a small group of underperforming organisations have very low levels of all three types of
intellectual capital. The researchers find that HRM, IT, and R&D investments are all very high in the group of
superior performing organisations that have high levels of human, social, and organisational capital. Furthermore,
firms with a high overall intellectual capital profile outperformed the low overall profile with regard to both financial
returns (9.52 per cent versus 1.21 per cent) and Tobin's q (3.97 versus 1.89). The high overall intellectual capital
profile exhibited financial returns at least 60 per cent greater than the uni-dimensional high human, high social,
and high organisational capital profiles. Being an intellectual capital ?specialist? does not result in superior
performance. Firms that do better need to invest in all three areas. As for Tobin's q, firms with a high overall
intellectual capital profile had a market-to-book value (3.97) two times greater than that of the low overall
intellectual capital profile (1.89). The study also showed that HRM and IT investments appear to influence
intellectual capital development more than R&D investments. More specifically, HRM investments tend to be
higher in firms with profiles high in human and social capital. The study also showed that investments in
information technology do in fact assist people in building social capital and knowledge webs in which knowledge
transfer and diffusion occur. Yet, this does not happen through the codification or institutionalisation of knowledge
as organisational capital. The authors (p. 355) explain that,
this is a surprising finding that is probably highlighting a persistent problem surrounding knowledge
documentation efforts: creating knowledge infrastructures and repositories may be quite simple, but
motivating people to provide the content to fill in the repositories and codify their evolving knowledge can be
quite challenging.
Hence, there is evidence to suggest that firms that identify, measure and invest in their intellectual capital achieve
higher levels of competitive advantage and ultimately higher levels of financial performance.
17
This was calculated by averaging an organisation's past two years ROA and ROE.
18
Tobin's q, is an indicator of market-to-book value. Future cash flows were estimated using Chung and Pruitt's (1994) simple approximation
where q = (market value + preferred stock + debt)/total assets. All performance data were obtained through Disclosure and Bloomberg.
19
Human capital represents the knowledge, skills, and abilities of employees. Social (relational) capital is the resources embedded within,
available through, and derived from a network of relationships. Organisational (structural) capital refers to an organisation's institutionalized
knowledge and codified experience stored in organisational memory devices such as patents, databases, manuals, routines, systems,
cultures, and so on.
91
Performance Measures, Employee Empowerment and Performance:
Hall (2008) investigates the effect of comprehensive performance measurement systems (PMS) on employee
empowerment
20
. A comprehensive PMS is one that provides performance measures that describe the important
parts of the operations. It integrates measures with strategy across the value chain and this can provide a rich and
relatively complete picture of the performance of the business unit (Chenhall, 2005; Ittner, Larcker, & Randall,
2003; Kaplan & Norton, 2001; Malina & Selto, 2001).
Hall (2008) hypothesises that empowered employees should perform better than those who are less empowered
(Liden, Wayne & Sparrowe, 2000). This is because empowerment increases both initiation and persistence of
managers‘ task behaviour (Conger & Kanungo, 1988; Thomas & Velthouse, 1990). In particular, higher levels of
psychological empowerment lead to greater effort and intensity of effort, persistence and flexibility (Spreitzer
1995; Thomas & Velthouse, 1990), all of which are behaviours that enhance performance (Mitchell & Daniels,
2003; Pinder, 1998).
Providing adequate performance information enhances the development of psychological empowerment.
Managers require information about the results of business operations to feel intrinsically motivated. Feedback
theories from psychology indicate that performance information can improve psychological empowerment by
providing information about task behaviour and performance (Collins, 1982; Ilgen et al., 1979; Locke, Shaw,
Saari, & Latham, 1981; Luckett & Eggleton, 1991). In particular, intrinsic task motivation is increased when
managers are provided with feedback about the results of operations (Ilgen et al., 1979). The greater the amount
of information provided on a job, the greater will be the motivating potential of the job (Ilgen et al., 1979). In
contrast, a lack of information about performance has adverse affects on feelings of empowerment (Chiles &
Zorn, 1995).
Hall (2008, p. 146) explains that a more comprehensive PMS provides the performance information necessary for
managers to develop higher levels of psychological empowerment. In contrast, a less comprehensive PMS
provides limited and inadequate performance information, and thus is likely to limit the development of managers‘
psychological empowerment.
Hall finds supporting evidence for the behavioural consequences of comprehensive PMS. A comprehensive PMS
influences managers‘ cognition and motivation, which, in turn, improves managerial performance. Psychological
empowerment acts as an intervening variable in the relation between comprehensive PMS and managerial
performance. Including the variables of cognition and motivation in research and work design can improve our
understanding of how management control systems affect managerial work behaviour.
20
Hall (2008, p. 145) explains that ?psychological empowerment refers to increased intrinsic task motivation manifested in a set of ?four
cognitions; meaning (the value placed on work judged in relation to an individual‘s own ideals or standards), competence (an individual‘s belief
in his/her capacity to perform a job with skill), self-determination (an individual‘s belief concerning the degree of choice they have in initiating
and performing work behaviours), and impact (the extent to which an individual believes they can influence outcomes at work) (Spreitzer,
1995; Thomas & Velthouse, 1990).?
92
Yet, Hall does not examine the effects of horizontal information sharing. An opportunity exists to examine how
horizontal information sharing, for example through joint target setting, affects firm performance (see also the
section on budgeting below).
Remuneration and the use of Intellectual Capital Measures
Evidence of the positive effects on performance of the use of nonfinancial performance measures in managers‘
compensation plans has also been noted during the past decade (Marr et al., 2003). For example, Chrysler
Corporation paid bonuses to its 200 top executives based on the attainment of vehicle quality and customer
satisfaction targets in addition to measures of profitability (Lavin, 1994); Ford Motor Company used an executive
compensation plan, similar to the plan used by Chrysler, which included nonfinancial customer satisfaction and
operational measures (Anon., 1998); and Ittner et al. (1997) report that 36 percent of the companies surveyed in
their study used non-financial measures in executive compensation.
Research has shown that linking remuneration to nonfinancial performance measures can have positive impacts
on firm performance. Harrah‘s Entertainment, (a US Gaming company), adopted a strategy to boost revenue
growth and profitability through a customer rewards scheme (Loveman, 2003). To support that scheme, the
company linked employee rewards to customer satisfaction. Hourly workers got paid cash bonuses for achieving
high customer satisfaction scores. Furthermore, the scheme was team-based, encouraging everyone to
participate and to share information on how to achieve high customer satisfaction scores. According to Loveman,
?In 2002, one property had record-breaking financial results, but employees did not receive bonuses because their
customer satisfaction scores were mediocre.? The strategy provided improved results. In 2002, the company
recorded a 14 per cent gain in revenues despite strong competition and compared to overall market growth of just
1 per cent.
Innovation
Research also shows a relationship between nonfinancial performance measures and innovation. Davila (2000)
finds that innovative firms use many more types of management controls than do less innovative firms. He
particularly finds that the use of intellectual capital/non-financial measures is significant in innovative firms. He
explains that management control systems in new product development cannot be restricted to traditional
accounting measures but needs to encompass a broader set of measures. Chenhall and Morris (1986) similarly
claim that in innovative firms, more broad-based information sets are used. Simons (2005) makes a similar point
in his description of job design. He looks at four basic spans of a job, including control, accountability, influence
and support, and examines how a manager‘s job can be configured differently in these four domains to help the
business realise its performance potential. Table 6 summarises Simons‘ four spans. The Span of Control
measures the breadth of resources (people, assets and information) the company makes available to the
manager
21
. The Span of Accountability is the type of goals the manager is expected to achieve and which he/she
21
Simons (1995, p. 58) provides practical examples. He explains that ?the spans of control for a store manager and a merchandising manager
at Wal-Mart are quite different. To ensure standardization in operations, Wal-Mart gives the store manager relatively little control. To promote
93
is evaluated on
22
. This can be ?narrow? measures, such as cost of goods sold, or ?wide? measures, such as brand
profit or customer satisfaction. The Span of Influence is the extent to which the manager depends on other people
to do his/her job. The Span of Support shows the degree of commitment of help from others within the company.
Simons (1995, p. 57) explains how narrow versus wide performance measures can increase innovation when a
manager has a narrow span of control;
in high-performing organisations, many people are held to broad performance measures such as brand
profit and customer satisfaction, even though they do not control all the resources - manufacturing and
service, for example - needed to achieve the desired results. There is a good reason for this
discrepancy. By explicitly setting the span of accountability wider than the span of control, executives
can force their managerial subordinates to become entrepreneurs.
Table 6: The Four Spans of Job Design
Narrow – (embedded
diagnostically)
Wide – (embedded
interactively)
Span of Control
Breadth of resources available to job
holder (people, assets &
infrastructure).
Reduces resources Increases resources
Span of Accountability
Type of goals the job holder is
expected to achieve.
Narrow metrics such as budget
line items or head counts.
Uses broader measures such as
customer satisfaction or profit.
Span of Influence
Extent to which the manager
depends on other people to do his /
her job.
Focused only on their own job, a
single reporting line.
The extent to which an individual
must interact extensively with,
and influence, people in other
units.
Span of Support
The degree of commitment of help
from others within the company
Low support or commitments of
help from other units.
Strong commitments of help from
other units.
Adapted from Simons (2005, p. 57)
Capital market valuations
Capital markets are calling for more reliable and measurable information regarding intangible assets, such as
strategic direction, risk factors, experience, integrity and managerial qualities (Eccles et al., 2001). This demand
for broader sets of information is, in part, being met by intellectual capital reporting. Some information is
communicated through annual reports, stakeholder reports, or intellectual capital statements (Guthrie, 2001;
the implementation of best practices, the company gives the merchandising manager a "wide" setting.? Turning to the span of influence,
widening it can counteract ?the rigidity of organisational structures based on boxes and silos. For example, although global companies like
Procter & Gamble need to be responsive to local customers' needs, they must also create pressure for people in different operations to look
beyond their silos to consolidate operations and share best practices to lower costs? (Simons, 1995, p.57). Lou Gerstner took charge of IBM in
1993, and Simons uses Gerstner‘s restructuring of the business as examples of span adjustment, ?narrowing the spans of control and
widening the spans of accountability for marketing and sales units. At the same time, he widened the spans of influence by formally pairing
product specialists with global industry teams, which worked closely with customers. To widen the spans of support, the company reconfigured
bonuses to give more weight to corporate results than to business-unit performance.? (Simons, 1995, p. 62).
22
Simons hypothesises that when the span of accountability is greater than the span of control, entrepreneurship will increase. ?The level of
an employee's accountability, as defined by the company, directly affects the level of pressure on him to make tradeoffs; that pressure in turn
drives his need for organisational resources? (Simons, 2005, pp.59). Also, if the span of influence increases and the rigidity of the
organisational structure decreases then innovation will go up.
94
Mouritsen et al., 2001), whilst other information cues are provided through private channels, such as
presentations to analysts (Holland, 2003; Garcia-Meca et al., 2005).
AMP, one of Australia‘s largest fund and wealth management companies, calls for a ?New Era in Company
Evaluation? (see Figure 3). They have started to analyse more dimensions of company performance, including
how companies manage their human capital, customer and community relations, supply chain, and brand values.
Often, they find that intellectual capital is critical to firm competitiveness.
Figure 3: Changing Information Requirements of Capital Markets
Source: Sustainability Alpha Team, AMP Presentation, Sydney, Australia, February, 2007
Higher levels of information disclosure and insights into business performance via intellectual capital reporting can
positively affect a firm‘s standing in capital markets. Intellectual capital information can reduce transaction costs
and uncertainty, and voluntary disclosures have proven to be beneficial to investors (Lev, 1992; Botosan, 1997;
Healey et al., 1999; Leuz & Verrechia, 2000). Guo et al. (2005) find that information about product development,
research and development and the competitive environment reduces information asymmetry and assists the
pricing of initial public offerings. Thomas (2003) examines the impacts of intellectual capital reporting with financial
analysts in the United Kingdom using an experimental design. She finds that an increase in disclosure of
intellectual capital information leads to a tighter range of share price estimates and a reduction in beta, resulting in
a lower cost of capital.
Yet, diversity in reporting formats and inconsistency in content across companies and time periods can make it
challenging for capital market players to adequately consider a firm‘s intangible value drivers and incorporate
these into firm valuations (Amber et al., 2001). There is also no coherent reporting framework in place. And
accounting standards bodies have had little success with increasing disclosures or putting into place reporting
standards.
95
Hypotheses:
? Firms with higher investment in intellectual capital achieve higher levels of performance.
? Firms that measure and report on their intellectual capital achieve higher levels of performance.
? Underperforming organisations (as measured by financial performance and innovation) have lower levels
of intellectual capital and higher performing organisations have higher levels of intellectual capital.
? Firms that use comprehensive performance measurement systems achieve higher levels of employee
empowerment (or commitment, see Nouri & Parker, 1998 below) and performance.
? Firms that use comprehensive performance measurement to determine staff remuneration achieve higher
levels of performance.
? Firms with higher levels of transparency via intellectual capital reporting (to staff, boards, investors and
others) experience higher levels of performance.
? Firms where the Board monitors intellectual capital performance achieve higher levels of firm
performance.
? Firms with higher levels of social (relational) capital (as defined by the resources embedded within,
available through, and derived from a network of relationships) experience higher levels of innovation.
2.7.3. Management Accounting Controls and Innovation
A central property of high performing organisations is innovation: the development of new products, services and
processes. On the one hand, innovation requires organisations to develop and explore new ideas which will bring
future benefits; but on the other hand, organisations also need to exploit existing products and processes in order
to gain benefits in the present. This concept, developed by March (1991) is known as ?ambidexterity?. There is
growing evidence to support the view that ambidexterity promotes organisational growth and adaptation (see
Govindarajan & Trimble, 2005; He & Wong, 2004; Markides & Charitou, 2004; Tushman et al., 2007). There is,
however, some confusion in the use of the term. In the view of O‘Reilly and Tushman (2008, p. 41), ?ambidexterity
is a specific capability embodied in senior leadership's learning and expressed through their ability to reconfigure
existing organisational assets and competencies in a repeatable way to adapt to changing circumstances?.
Tushman et al., (2007) show that ambidextrous designs are more effective than functional, cross-functional or
spin-out designs, and that switching to an ambidextrous design was associated with increased innovation.
Further, the performance of existing products is higher in ambidextrous organisations. Other studies have
suggested that the combination of exploration and exploitation is associated with longer survival (Cottrell & Nault,
2004), better financial performance (Govindarajan & Trimble, 2005; Markides & Charitou, 2004), and improved
learning and innovation (Adler et al., 1999; Holmqvist, 2004; Katila & Ahuja, 2002; McGrath, 2001; Rothaermel &
Deeds, 2004). Thus, although ambidexterity is a difficult managerial challenge, often these complex designs of
organisational forms and associated management accounting control systems are associated with sustained
competitive advantage.
As March (1991, p. 71) explains,
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Exploration includes things captured by terms such as search, variation, risk taking, experimentation, play,
flexibility, discovery, innovation. Exploitation includes such things as refinement, choice, production,
efficiency, selection, implementation, execution. Adaptive systems that engage in exploration to the
exclusion of exploitation are likely to find that they suffer the costs of experimentation without gaining many
of its benefits … . Conversely, systems that engage in exploitation to the exclusion of exploration are likely
to find themselves trapped in suboptimal stable equilibria.
Management accounting controls (like budgets, profit planning systems, brand revenue systems, intelligence
systems) are important to ambidextrous designs. Depending on how they are used, they can assist managers to
both exploit and explore. In ?exploit? situations, they are typically used to help the organisation progress towards
predefined strategic intents or goals. An example is when performance measures are used to track progress
towards goals and compare outcomes to expectations. The aim is to reduce deviation from strategic intent and
goals, and to monitor performance. In this mode, deviations are to be avoided and there is a lesser focus on
innovation.
In contrast, in ?explore? situations, management control systems are used to identify emerging opportunities and
threats. An example is when a new service opportunity emerges and an organisation has to consider what to do
about it. In this mode, there is generally more focus within the organisation on innovation, and interactive
management controls are one way that the firm can organise itself accordingly (Simons, 1995).
Managers can thus use management accounting controls to make decisions about the relationship between the
exploration of new ideas for the future and exploitation of existing ideas for the present. Management accounting
controls help organisations to appreciate when innovation should be enabled and extended, and when innovation
should be constrained and reduced. Simons‘ (1995; 1987; 1990; 1991; 1994; 2000; 2005) distinction between
interactive and diagnostic use of management control systems reflect these two situations (see Table 7).
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Table 7: Differences between Interactive and Diagnostic Use of Management Accounting Controls
Diagnostic use of management
controls (Exploit)
Interactive use of management controls (Explore)
? The main aim of controls is to
implement established
strategy.
? Controls ensure that
managers‘ activities are
directed towards predefined
goals.
? Controls align or tie the
organisation together.
? Deviations from the plan are
undesirable and should be
corrected.
? Controls have a historic
focus.
? The main aim of controls is to continually explore and
identify new and emerging strategic opportunities and
threats.
? Controls encourage managers to continually challenge
their assumptions about the business, market, and action
plans and explore new strategies.
? Controls encourage diversity in thinking and allow
managers to question and revise their goals.
? Deviations from the plan are opportunities for learning and
change.
? Controls have a forward looking focus.
Source: Adapted from March (1991) and Simons (1995)
Importantly, the significance of a management control lies not so much in the nature of the tool but rather in how it
is used. Davila (2005) illustrates how the same control tool – in this example, a product development manual –
can be used either diagnostically or interactively. He traces two different interpretations of product development
manuals in two companies to illustrate this:
Both companies were in the medical devices industry. A first look at their product development
processes would suggest that both had good processes in place, with stages and gates, clear
procedures, and checklists to coordinate the support activities of all departments. However, when
talking with the managers of the process, two distinct realities emerged. In the first company, the
manager saw her job as disciplining the project teams to follow the routine. She made sure that all
the documents were in place, that every gate was properly documented, that every step in the
process was carefully followed. Her objective was to maintain the routines – no change and strict
adherence to it, which she saw as a blueprint to be closely followed. She perceived deviations from
the manual as exceptions that required corrective action. Her interpretation of the manual was a
system to capture and code new knowledge. Project managers saw her role as controlling them. In
contrast, the manager in the second company saw her role very differently. She saw the routine as
an evolving adaptive tool. She sat down with project teams to tailor the process to the project‘s
needs, to make sure that the routine provided value to the teams. Not only was the routine adaptive,
most importantly, the manager reviewed each finished project with the project team to update the
product development manual and make it more helpful the next time. Deviations from expectations
were opportunities to bring about improvements to the current processes. The manual was alive,
constantly evolving and incorporating learning. The product development manager saw
management control systems as not only helping execution but also capturing learning, which in the
former company was lost.
In the following sub-sections, we discuss in more detail the differences between diagnostic and interactive use of
management controls.
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Diagnostic Use of Controls
Simons (1995) compares the diagnostic use of controls to the control panel of an aircraft. The control panel
enables the pilot to scan for signs of abnormal functioning and to keep critical performance variables within
present limits. He uses the analogy to argue that companies similarly use management controls to, ?help
managers track the progress of individuals, departments or production facilities towards strategically important
goals? (P. 81). Feedback from this process allows management to alter and finetune inputs and processes so that
future outputs will more closely match goals. As such, they monitor performance and set boundaries for employee
behaviour.
Another practical illustration of a diagnostic use of a management accounting control is the monthly financial
budget used to check organisational or business unit performance against target. The information is used by
senior management to monitor operational performance and if required take corrective action. Furthermore, the
focus is historic, i.e. the previous month or accounting period.
When used diagnostically, the aim of the management accounting control is to regulate and channel employee
activity so that the organisation exploits existing products and processes in order to gain benefits in the present.
Diagnostic use of control systems is oriented towards reducing the uncertainty facing subordinate managers by
formulating and delegating clear goals and priorities. Hence, diagnostic use of management accounting controls
need not be a negative experience for employees. Indeed, Marginson and Ogden (2005) find that budgets have a
positive, ?comforting? role to play in an individual's work experiences. Managers confronted with uncertainties
associated with role ambiguity responded by becoming positively committed to achieving budgetary targets as
budgets offer a source of structure and certainty. The use of budgets as an antidote to role ambiguity is a powerful
influence on the manager's budgeting behaviour. Storey et al. (1997) similarly explain that a sense of satisfaction
was expressed by managers in companies with demanding targets since these firms appear to know where they
are going and what they want from their managers. Managers generally appreciated the sense of strong direction
from the top, as expressed in the detailed specification and tightness of their performance targets. They
welcomed the sense of certainty and mission this communicated.
Hence, diagnostic use serves to make the organisation predictable by reducing uncertainty and promote clarity of
goals and objectives. This situation can possibly give rise to certain kinds of innovation, possibly the so-called
incremental innovation, where individuals have discretion over how goals and strategic intents are achieved and
may improvise along the way. Yet, a main aim of the exploit mode and the diagnostic use of management
accounting controls is to monitor the implementation of predefined goals and ensure these are achieved. This is
how diagnostic use of management accounting controls works; it implements strategy by taking formulated key
performance indicators literally.
Interactive Use of Controls
Whilst diagnostic use of controls seeks to eliminate deviation, interactive use of controls seeks to explore
emerging opportunities and threats, thus facilitating learning and innovation. Simons (1995) describes interactive
use of control systems as scanning mechanisms. They are, ?formal information systems that managers use to
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Management accounting controls
(such as budgets, targets and plans)
affect business performance. When
used diagnostically, controls aim to
eliminate deviation and monitor
progress towards predefined goals.
This can increase productivity, yet it
may hamper innovation.
In contrast, when used interactively,
controls help managers to challenge
existing thinking and explore strategic
uncertainties that emerge in the
market and elsewhere. This makes
the firm more innovative and starts a
dialogue that crosses many
organisational divisions.
The survey will examine the use of
management accounting controls and
its impact on firm performance.
involve themselves regularly and personally in the decisions of subordinates, (and through them) senior managers
participate in the decisions of subordinates and focus organisational attention and learning on key strategic
issues? (p. 86). He also cites interactive controls as necessary to overcome limitations of information sharing as
companies grow. They are a precondition necessary, ?to share emerging information and to harness the creativity
that often leads to new products, (or services) line extensions, processes and even markets? (p.86).
A practical illustration of the interactive use of a control is the profit-planning system at Johnson and Johnson.
According to Simons (1995, p. 88), this system is used interactively to,
focus attention on the development and protection of innovative products in its various markets.
Managers periodically reestimate (sic) the predictive effects of competitive tactics and new product
rollouts on their profit plans for the current and following year. The recurring questions posed by
managers are: What has changed since the last forecast? Why? What are we going to do about it?
The results are new ideas and action plans.
It can be seen from the example above that interactive
management accounting controls demand regular attention
from operating subordinates at all levels of the company.
Interactive use is different from diagnostic use of management
controls because it focuses more on attempting to understand
the strategic uncertainties pertaining to an organisation.
Simons (1994) shows that use of interactive systems is related
to an aspiration to identify and learn about strategic
uncertainties arising from external changes in customer-
relations and socio-economic conditions and internal changes,
i.e. the development of knowledge resources and
organisational competencies. Furthermore, interactive use of
accounting control systems is collective and mobilises many
actors in the organisation to help interpret uncertainties
pertaining to the established strategy. Interactive use makes
the interpretation of information a broad and collective affair
(Simons, 1987; 1991; 1994). Interactive use of diverse
management accounting control systems makes it possible to explore short term and long term strategies by
stimulating face-to-face dialogue and building information bridges across hierarchical levels. In this way,
interactive control systems are helpful in overcoming organisational silos and bringing together people who may
not regularly engage in frequent dialogue or the exchange of ideas and knowledge.
Empirical research supports that interactive use of management accounting controls is related to firms that
conduct innovation. Bisbe and Otley (2004) show that when environments are complex and dynamic, firms‘ use of
management control systems foster dialogue and interaction about the development of products and markets, and
innovation is supported by interactive use of management control systems particularly if innovation levels are low.
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Also, Henri (2006) finds that interactive use of management control systems influence innovativeness positively.
According to Bisbe and Malagueño (2009), higher levels of interactive use of controls systems are associated with
a greater emphasis on innovation activities.
Abernethy and Brownell (1991, p.192) similarly suggest that,
interactive use of budgets, with its focus on dialogue, communication and learning, between top
management and subordinates as well as among managers at the same level, is consistent with
the operation of cross-functional liaison groups. Indeed, it can be seen, itself, as an integrative
liaison device that breaks down the functional and hierarchical barriers that inhibit information flows.
In a later study, Abernethy and Lillis (1995) find that ?spontaneous contact? and ?integrative liaison devices?, which
allow regular, personal and intensive contact are more prevalent in flexible manufacturing firms while traditional
performance measurement systems are de-emphasised.
Below are a set of suggested priorities for management controls that emphasise the interactive use of
management control systems that increase innovation in firms (adapted from Davila, 2009):
1) Explore Uncertainty. If used interactively, management accounting controls increase the number of
aspects of a situation. This may sometimes increase uncertainty because the situation will be understood
more realistically. Increased uncertainty or at least ambiguity may trigger more innovative responses.
2) Make goals provisional. When learning happens via interactive use of management control systems it is
possible to realise that goals may not be appropriate and that it is possible to conceive of quite different
actions to help the firm overcome obstacles.
3) Change learning from past. Interactive use of management accounting control systems may make
organisational participants aware that certain rules of thumb about the functioning of the firm and its
environment may be erroneous. Learning is required when the past is not a good guide in solving the
problems of the future.
4) Develop coordination. Interactive use changes the conventional idea of coordination from one of
decoupling the efforts of organisational actors to one of high coupling of their actions. Interactive use of
management accounting control systems ask organisational participants to intervene often so that, during
decision making situations, the many perspectives of any strategies‘ uncertainties are considered.
5) Plan the voices to be heard. Rather than planning the process and sequences of steps, interactive use of
management accounting controls focuses on mobilising all that may add value to the dialogue. This is a
not a sequential model of interdependent actions, but rather a hub (Mintzberg & van der Heyden, 1999)
where all relevant participants are gathered and have to be heard before all can go in a common
direction.
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6) Make accountability lateral and social. For accountability to work, it must be mediated by social
encounters where participants can react to the propositions made by others. Only then is it possible to
take into consideration the complex interdependencies that exist in modern organisations.
7) Symbols to legitimise. Interactive use of management accounting controls may use many symbols and
visionary objects such as mission statements because many of the products and processes to be
developed (in the future) are not really conceptualised at the time of interactive engagement.
Summary
This section has illustrated the significance of diagnostic and interactive use of management accounting controls
(such as budgets, business plans, targets, etc) to firm performance and explored the effects of management
accounting controls on innovation. It has shown that firms can use management control systems both
diagnostically and interactively. In general, diagnostic use of management accounting controls aims to eliminate
deviation and monitor progress towards predefined goals and this reduces innovation activity
23
. The aim here is to
ensure the firm exploits existing products and processes to deliver benefits for the present. In contrast, interactive
use of management accounting controls helps managers to challenge existing thinking and explore new
opportunities and threats that emerge in the market and elsewhere. The aim is to make the firm innovative
through a dialogue that crosses many organisational divisions, such as service and product groups and back
office functions. This shows the ambidextrous character of innovative firms, which in some situations have to
exploit, and in others, to explore. Importantly, firms most often have to conduct both activities contemporaneously.
Hypotheses:
1. High performing firms use management accounting controls diagnostically to eliminate deviation and
monitor progress towards predefined goals. The aim is to ensure that the firm exploits existing
products and processes to deliver benefits for the present.
2. High performing firms use management accounting controls interactively to challenge existing
thinking and explore new opportunities and threats that emerge in the market and elsewhere. The aim
is to make the firm innovative through a dialogue that crosses many organisational divisions and
enable learning.
3. High performing firms use management accounting controls both diagnostically and interactively.
They manage well the challenge of ambidextrous designs.
23
Yet, there is also some research that shows that diagnostic use of controls is required for innovation to unfold. Formalisation – the process
of turning activity into a documented routine or protocol - is sometimes a value add, even a requirement, for innovation. While innovation is
often associated with flexibility and creativity (Simons, 1995) organisations must still exercise adequate control and formalise the procedures
that ensure new ideas are turned into products, processes or services. Simons (1995) for example points out that diagnostic use of
management controls can be particularly important in environments characterised by a high level of uncertainty, even chaos. Chapman (1998,
p. 738) used four case studies to conclude ??that accounting does have a beneficial role in highly uncertain conditions?. Howard-Grenville
(2003) used an ethnographic approach in one high-technology company to document the relevance of organisational routines to confront
uncertain and complex situations. Uncertainty provokes a constant shift of priorities that may undermine the innovation process. Management
controls, such as targets and measures, increase stability and visibility, facilitate convergence in meaning across organisational actors, and
provide the clarity that creativity is argued to require.
102
Employee involvement in strategy
making is critical to firm
performance. We survey how ‘deeply’
into organisational hierarchies
strategy-making extends and propose
that those firms with superior
performance are those that excel at
involving employees at all levels in
the strategic planning process.
This makes strategy an ‘anti-heroic’
affair where those closest to the
customer are involved in designing
the future directions of the firm.
2.7.4. Management Accounting Controls that Increase Employee Participation and Involvement
Control systems are put into place to define rules and erect boundaries for what can and cannot be done in
organisations. However sometimes rules and controls can be so tight and top-down driven that they constrain and
limit an individual‘s performance. They can, for example, prevent lower level staff from making a contribution in
areas where they have better answers to problems than those ?above?. The tension, here, is how to enable and
empower people to participate in decision making and lead change, yet also steer their focus and behaviours in a
common direction so as to ensure goals and targets are met and reduce risks of drift and wasted resources.
Research shows that firms that involve their employees in key decision making processes (such as setting and
implementing strategy, building budgets, designing targets etc) experience higher levels of performance
(Harrington, 2006, Vila & Canales, 2008).
Employee Involvement in Strategic Decisions and Implementation Tasks
Harrington (2006) found that firms using high involvement management tactics during strategy decisions and
implementation produced up to a 9 per cent better overall firm performance (a measure based on profitability,
financial and stock price performance), compared to firms that used
low involvement management tactics. This difference in overall firm
performance was 2 - 3 per cent for all firms in the study, but grew to
approximately 9 per cent in the case of small firms. Size was also
important in the comparison of firms with high and low numbers of
operating units. The lower the number of operating units, the higher
the correlation between high involvement tactics and superior firm
performance.
Similarly, the famous Sears case study (Rucci et al., 1998)
illustrates that a bottom-up approach to strategy-making has
significant financial benefits. By increasing involvement of staff
across all levels of the organisation, Sears was able to improve
employee attitudes and thus performance. They found that a change in
employee attitudes translated into an improvement in customer satisfaction and financial performance. The firm
developed a predictive model to track this. The model showed that ?a 5 point improvement in employee attitude
will drive a 1.3 point improvement in customer satisfaction which in turn will drive a .05 per cent improvement in
revenue growth? (Rucci et al., 1998, p. 91). Over a 12 month period, a change in employee attitudes translated
into an additional US$200 million in revenue, resulting in an increase in the company‘s market capitalisation of
one quarter of a billion dollars
24
.
24
It should be noted that a wider range of activities were implemented during the business transformation including the introduction of a new
leadership model, a team-based structure along with the creation of Task Forces, Town Hall Meetings and Action Planning. Sears also used
Learning Maps to enable employees to understand the business and their role in advancing the business; opened a university and introduced
learning and development programs; changed rewards and compensation including remuneration based on non-financial performance
measures; and developed new employment, promotion and appraisal criteria.
103
On the other side, Melina and Selto (2001), in their study of the Balanced Scorecard, found that several factors
negatively affected employees‘ perceptions of the Scorecard and caused significant conflict and tension. One of
these was that communication about the Balanced Scorecard was one-way (i.e. top-down and not participative).
25
According to Melina and Selto (2001, p. 70),
....there was abundant evidence that the DBSC administrators' frequent use of One-way reporting is a
direct cause of Conflict/tension (16 causal links). Unfortunately, the Conflict/tension appeared to be
unproductive....... This may contribute to a climate of distrust and alienation that reduces the company's
and its distributors' effectiveness. The company imposed measures and benchmarks without seeking
input, and then used it as a diagnostic control and an evaluation measure. Distributors felt ignored and
trivialized because of their non-involvement. However, they have little recourse because of the frequency
of One-way reporting, which was a common complaint.
Some studies have also found that employee involvement brings about diversity in views and perspectives and
that this is a key driver of innovation. Along these lines, Bantel and Jackson (1989) and Judge and Zeithaml
(1992) found a negative relationship between top management team homogeneity and an openness to innovation
and change. Employee involvement increases diversity and this is seen to lift innovation and firm performance.
Barringer and Bluedorn (1999) find a positive correlation between employee involvement in strategic planning and
the intensity of corporate entrepreneurship. They theorise that the correlation is based on the facilitation of
opportunity recognition through contributions from a diversity of people (see also Dutton & Duncan, 1987),
including those who are closest to the firm‘s customers, whilst at the same time legitimising the active involvement
of middle- and lower-level managers in strategic processes. They (p. 436) explain that,
… a high level of employee involvement in planning facilitates firm-level entrepreneurial behaviour. This
result is supportive of the general notion that employee participation at all levels is an essential key to the
entrepreneurial process (e.g., Burgelman, 1984). The result is also consistent with Sathe's (1988)
observation that if entrepreneurship is to flourish in an organisation, lower-level managers need to be free
to identify and pursue promising opportunities. ... This result reaffirms the notion that control systems
capable of rewarding creativity and the pursuit of opportunity through innovation are an essential part of
the entrepreneurial process.
Barringer and Bluedorn (1999) also note the important issue of wide access to proprietary and potentially
sensitive information that is inherent in a strategising process involving a high number of people at various levels
in the firm hierarchy. Whilst this is a risk to the confidentiality of that information, it also points to the need for such
information to be widely accessible to facilitate a highly participative planning process.
25
Two other shortfalls were that: 1) measures are inaccurate or subjective; and 2) benchmarks are inappropriate but used for evaluation.
104
Budget participation is when
employees are involved in and have
influence on the setting of budgets
and targets. High participation
includes frequent and wide ranging
discussions between superiors and
subordinates about budgeting issues.
Nouri and Parker (1998) find that
participation of middle and lower
levels staff increases a person’s
commitment to the organisation,
and lifts job performance.
The survey examines the extent to
which Australian firms have in place
participative budgeting processes and
the effects thereof on innovation and
productivity.
Participative Budgeting
Budget participation is the process in which individuals ?are involved in, and have influence on? the setting of
budgets (Brownell, 1982, p. 124). High participation includes frequent and wide ranging discussions between
superiors and subordinates about budgeting issues (Milani, 1975).
One of the important benefits of a participative budgeting process is the sharing of information between
organisational members (Hopwood, 1976). Shields and Shields (1998) point out that information exchanges
between subordinates and superiors during budget discussions are especially important with many possible
benefits for individual and organisational performance. High levels of participation and frequent information
sharing can also improve the level of commitment that an individual has to the organisation.
Shields and Shields (1998) review 45 studies which mention a
total of 62 assumed reasons for the existence of participative
budgeting. These are grouped into six categories: employee
motivation (23), share information (mostly vertical information
sharing) (22), employee satisfaction (13), reduce the need to
create slack (2), co-ordination (1), and job-related tension (1).
Nouri and Parker (1998) look at the impacts of a participative
budget process on performance and employee commitment.
Organisational commitment is, ?a psychological state linking the
employee to their organisations? (Meyer & Allen, 1997, p. 23). A
high level of commitment is when an employee has a strong
belief in the organisation‘s goals, strong willingness to help the
organisation reach its goals, and strong desire to maintain
organisation membership (Angle & Perry, 1981; Mowday, Porter
& Steers, 1982; Porter, Steers, Mowday & Boulian, 1974). Nouri
and Parker (1998) find that budget participation increases job performance directly and also indirectly via budget
adequacy and organisation commitment. The study also finds a direct effect between budget participation and
commitment, which illustrates that participation of middle- and lower-level staff in the budget process increases a
person‘s commitment to the organisation.
Parker and Kuj (2006) extend this and find that organisational commitment has a significant indirect effect on
performance through information sharing. That is, information sharing fully mediates the relation between
commitment and performance. Participative budgeting provides an opportunity to share information on problems
and opportunities with others and this enhances performance. In other words, individual performance is enhanced
when information sharing is high.
Nouri (1994) looks at commitment, involvement and budget slack. He hypothesises that two motivational factors
of organisational commitment and job involvement are important to explaining managers‘ propensities to create
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budgetary slack. Budgetary slack is when managers intentionally build excess requirements for resources into the
budget or knowingly understate productive capability (Young, 1985). Organisational commitment is when the
individual is highly committed to the organisation‘s goals and values and willing to exert considerable effort on
behalf of the organisation. Job involvement is defined as the degree of importance of one‘s job to one‘s self-image
(Lawler & Hall, 1970). Managers with a high level of job involvement may have a higher propensity to project their
jobs and self image in down periods, whilst managers with lower levels of job involvement may have less
propensity to create budgetary slack since they do not identify and care about their jobs. They are more
concerned with the organisation and meeting its overall objectives than defending their own position and job.
Survey data was collected from a sample of 203 supervisors and managers in a large multinational organisation.
The study confirms the hypothesis that organisational commitment and job commitment interact to create
budgetary slack. The important practical implication is that a company that effectively uses policies to increase the
commitment of managers to its goals and values will experience lower levels of budgetary slack. Devotion and
loyalty to the employer reduces the propensity to create budgetary slack and advance one‘s own position.
Mia (2002) looks at the relations between budget participation, an employee‘s level of motivation and attitude and
performance. She finds that participation in the budgeting process was associated with improved performance
when managers have a favourable attitude and higher levels of motivation. In contrast, when managers exhibited
a less favourable attitude and lower levels of motivation, performance was hampered. Mia‘s (2002) results support
the fundamental argument that an organisation may be better off following a budgeting style (participative or non-
participative) that is congruent with its employee attitude and motivation. If people‘s motivations are low, a non-
participative budget style may be more effective. If motivation is high, a participative budget style is more
effective.
Employee Involvement in Setting Budget Targets and Evaluation Criteria
Libby (1999) examines the relationship between the use of a fair budgeting process (including the setting of
budget targets) and subordinate performance. A fair budgeting process and target, as defined by organisational
justice theory (Greenberg, 1993), has two components: 1) the subordinate's involvement in the budgeting
process, called ?voice?
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; and 2) the communication of a rationale for the subordinate's lack of involvement over
the final budget target the superior sets.
Libby (1999) points out that a challenge to the manager using a consultative budgeting process is that
subordinates may view the process as pseudo-participative. A pseudo-participative process is defined as a
budgeting process that leads subordinates to believe that they will have some influence on the budget that is set,
but in reality, their input is ignored (Argyris, 1952). Avoiding the perception that the budgeting process is pseudo-
participative is important because pseudo-participation can have de-motivating effects on subordinates (Pasewark
& Welker, 1990).
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In the ?voice conditions‘, subjects were told that the budget target had been tentatively set at two hundred symbols, but they were given the
opportunity to communicate their preferred budget to the superior. In the ?no voice conditions‘, no opportunity for communication with the
superior was given.
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The communication of a rationale for the subordinate's lack of involvement over the final budget was found to be
important to performance. While managers can benefit greatly from subordinate input in making difficult allocation
decisions, they may not be able to act on them in all cases. Subordinates may become resentful and their
productivity may suffer. Providing subordinates with an adequate explanation for their apparent lack of influence
over the final budget the manager sets can lessen resentment and improve performance.
The results of Libby‘s (1999) study show that differences in performance can be explained by the different
processes under which the budget targets were set. Those employees who received both a voice and an
explanation for the budget target that was set perceived the budget and budgeting process to be significantly
fairer and had higher performance than those who had a voice, but received no explanation, and those who
received an explanation alone, and also those who received neither a voice nor an explanation. Results indicate
significant performance improvements when voice and explanation are combined.
Hirst and Lowy (1990) investigate the effects of feedback on performance. They find that feedback on goal
achievement affects job performance. Job performance was higher when managers were given more frequent
feedback on difficult goals. Importantly, the study found that budget goal difficulty in itself does not result in higher
performance. Both budget goal difficulty and budget feedback are necessary for high performance. This confirms
the importance of frequent interaction and dialogue between supervisor and employee in goal setting and
attainment.
Poon et al. (2001) argue that goal interdependence is increasingly important to firm performance given the
interdependencies between team members in achieving high levels of performance. Hence, how a manager
believes his/her goal relates to those of other team members affects performance. Deutch (1990) refers to
cooperative goal beliefs which arise where managers perceive that a successful outcome for one team member
helps other members to succeed. Individuals believe their goals are positively linked with those of other team
members. Team members will therefore gain personally by helping others to perform effectively. Cooperative
team members will tend to work closely with other members to resolve problems hampering budget attainment. In
contrast, managers with competitive goal beliefs believe their goals are negatively related with other team
members‘ success. Their success is frustrated by the success of others, and as one moves towards goal
attainment others experience difficulties in attaining their goals. This form of ?win–lose? contest leads to a lack of
mutual support and escalation of unproductive conflict.
Poon et al. (2001) find that within a participatory budgeting context, cooperative goals, as compared to
competitive goals, promote an open-minded discussion and strengthen team relationships, group productivity and
budget quality. Participative budgeting processes help managers and subordinates probe and resolve budget
issues, strengthen relationships, and improve budget performance. Participation in setting goals and targets
provides an opportunity for managers to work together creatively in identifying and managing common problems.
It increases the likelihood of developing cooperative goal beliefs which, in turn, improve performance.
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Yet, little research examines how vertical information sharing in participative budgeting can affect performance.
People in different teams or functional areas increasingly have to work together and depend on each other in
executing strategy and achieving goals. Thus, an opportunity exists to examine the extent to which vertical
information sharing in participative budgeting can affect firm performance.
Hypotheses:
? Firms with higher levels of employee involvement (in strategy making, strategy implementation, budgeting
and target setting) experience higher levels of firm performance (including innovation).
? Firms with participative decision making processes have higher levels of employee empowerment and
thus higher performance.
? Firms with higher levels of vertical knowledge/information sharing during budget processes (and in
general) have higher levels of performance.
? Firms that recognise/reward suggestions for improvement to work processes from staff have higher levels
of performance (including innovation).
2.7.5. Opportunities to Managers
This review has illustrated that management accounting controls (such as plans, target, procedures, manuals, and
budgets) play a significant role in creating high performing workplaces. They influence innovation, productivity,
fairness and staff engagement in various ways. Specifically, the section has illustrated that:
- Intellectual capital/nonfinancial performance measures play a critical role in lifting business performance.
They make invisible resources amenable to management intervention; they inform strategic decision
making and resource allocation; they guide the behaviour of staff (especially when tied to remuneration
and performance appraisals); they assist Boards and executives to monitor a firm‘s key value drivers and
long term health; and they help capital markets make better informed decisions and valuations.
- Management accounting controls also affect firms‘ innovation capacity in subtle (yet powerful) ways.
Coming up with the ?right? use of management accounting controls is a balancing act for managers, Chief
Financial Officers and CEOs alike. If used interactively, management accounting controls can produce
innovation effects while if used diagnostically they are directed at eliminating deviation and ensuring
conformity to pre-established targets. If controls focus too much on exploitation (i.e. diagnostic use), they
may limit innovation, learning and experimentation. On the flip side, if they focus too much on exploration
(i.e. interactive use), they can possibly create confusion, even slack and wasted resources. Ambidextrous
firms do both activities simultaneously. Yet, getting this use of management accounting controls ?right? is
a balancing act to managers and others.
- Employee involvement and participation is critical to lifting firm performance. Diversity increases
innovation. Furthermore, those employees closest to the customer often have the knowledge and ideas
required to create better value for customers. Higher levels of participation in, for example, budgeting and
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target setting processes, aids horizontal and vertical information flows and knowledge exchange, and thus
performance. It is no surprise that firms which design management accounting controls that increase the
involvement of employees in key decision making processes (such as strategy, participative budgeting,
target setting) experience higher levels of performance.
2.8. The Role of the Board in Creating a High Performance Workplace
The corporate governance reforms that have taken place over the past twenty years around the world have for the
most part been driven by concerns to restore or enhance investor confidence in the capacities of a board to
protect shareholders‘ interests from the potential distortions or damage of executive self interest. Informing this
orientation to the corporate governance problem has been a continuing series of corporate collapses which have
called into question the reliability of corporate financial disclosures and the adequacy of board, and in particular
non-executive director oversight of executive performance. The progressive strengthening of the specification of a
board‘s ?control function? in relation to areas such as audit and risk, remuneration and nomination, together with
increasing scrutiny of non-executive independence can all be seen as attempts to enhance the performance of
the board in relation to these control issues. This focus is supported conceptually by so called ?agency theory? in
which the problem of executive self interest is given prominence and remedied through the monitoring of
?independent? non-executives, disclosure and the use of incentives (Fama, 1980; Jensen & Meckling, 1976).
One possible unintended consequence of this focus of reform on the control function of the board is the relative
neglect of what the original Cadbury Committee in the UK termed the ?primary and positive? role of the board in
giving leadership to a business (Cadbury, 1992). The focus of this project on the creation of a high performance
culture within a business has the potential to shift the focus of research on corporate governance towards these
more positive potentials of board oversight. In particular, it draws attention away from the quality of external
disclosure, and associated conflicts of interest, to focus on issues of longer term business strategy and the drivers
of value creation both within the business and in relation to its markets and competition (Roberts et al., 2005).
In order to contribute to a company‘s high performance the board must first look to its own processes and there
are important differences here in how a chairman manages board processes, in chief executives‘ attitudes to the
role of the board, and in how non-executives seek to enact their role that shape the board climate and the focus of
its work (Walker, 2009). Of particular relevance may be board composition in so far as it brings relevant industry
and technical knowledge, and risk appraisal in relation to new product development.
A board has the rather intangible function of creating an environment within which an executive team leads a
business and in this way can do much to condition the climate and culture of an organisation. What the board
takes seriously or ignores, what it insists upon or neglects, sends strong signals to the executive team and the
rest of a business as to what really matters. A generic issue here is the way that a board conditions the time
horizon of executive attention and action. At one end of the spectrum, board oversight of immediate financial
performance can merely amplify pressures from investors for immediate returns. At the other end, a board can be
alert to the risk that such short term financial performance can be realised at the expense of future performance,
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Defensive corporate governance is when
there is a dominant preoccupation with
governance processes, such as risk
identification and audits, within a board.
In contrast, a high performing workplace is
one where board directors take a more
balanced approach and work with senior
executives to develop the longer term
strategy for the business and monitor the
firm’s future value creating capacity.
In this study, we examine the extent to
which Boards monitor the non-financial
indicators of the firm.
and seek to ensure that at least part of executive energies are given to the development of capabilities within the
organisation (Koller et al., 2005; Hilman & Dalziel, 2003). Within the conventional governance literature there is
now a recognition that managing the share price is very different from maximising the long term value of a
company (Jensen, 2001; Bebchuk & Fried, 2003).
One of the board‘s primary contributions to creating a high performance business lies in its role in the selection of
a Chief Executive and associated executive team. These are the key decisions upon which much else then
depends. We would expect that a high performing board would pay particular attention not just to the proper
management of immediate succession but also to the more
systematic management of senior executive development
plans (Shen & Cannella, 2003). This ensures that there is
ideally a pool of talent to manage future succession beyond
the incumbent executive, and that potential future senior
executives are being given the appropriate responsibilities
and opportunities to build and develop their skills.
A second key contribution of a board lies in the way that it
works with senior executives in developing the longer term
strategy for the business. Again, one of the unintended
consequences of the defensive focus of corporate
governance can be to effectively limit the board‘s oversight
and involvement in testing and challenging executive
strategy. These effects can be traced to the strong short term
financial pressures placed upon executives by investors, and a rather defensive preoccupation with corporate
governance processes within a board. At least from the perspective of directors a strategic focus to a board‘s
work, and in particular non-executive testing of executive strategy, is what gives substance to the board‘s unitary
designation and adds most value to executives through drawing fully on the skills and experiences of non-
executives in support of executive performance (Stiles & Taylor, 1996).
What empirical evidence there is suggests that a board‘s involvement in the executive strategy process is very
variable. Minimally the board, and non-executives, perform no more than a ritual rubber stamping role in relation
to executive proposals. A more fully developed strategic role for a board can involve focused ?off board? sessions
with the executive team and the careful management of the board agenda to ensure that there is space for the
discussion of strategic issues at every board meeting (McNulty & Pettigrew, 1999). A climate of openness
between executives and non-executives allows the Chief Executive to bring matters to the board for discussion at
an early stage prior to the development of detailed proposals. This guards against executive escalation of
commitment, and gives the board exposure to the thought processes within the executive team, prior to the
submission of definitive proposals to the board for final approval.
It is within the umbrella of such processes that a board can do much to support the executive in creating a high
performance culture. Oversight of technical changes and new product development are obviously key here, but
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these in turn need to be assessed against the less tangible issues of whether the business is developing the
appropriate intellectual capital to support its future development. Some of this is about the design of performance
management and reward systems and the possible use of non-financial performance metrics to focus effort and
reward different aspects of performance (see Section 2.8 on intellectual capital above). Some of this is about
developing and implementing leadership metrics as part of the performance measurement of the senior executive
team (Collins, 2005).
2.9. Information and Communication Technology
2.9.1. Introduction
Despite the considerable investment in ICT by organisations in the 1990s, there was little evidence that this
investment led to increases in national productivity, a phenomenon referred to as the ?IT Productivity Paradox?
(Brynjolfsson, 1993). More recently, evidence is emerging that supports a link between ICT investment and firm
performance (see OECD, 2004). Australia has performed particularly well in ICT investment, with Keane (2008)
reporting that IT investment contributed about one third of the labour productivity growth rate of 3.1 per cent over
the period of1993 to 2000. These improvements arise from multifactor productivity (MFP) growth, in which two or
more of the following are present: the introduction of new technology; improved workforce skills and education
(labour quality); economies of scale; and better management and work practices. Thus, the improvement in firm
performance attributable to ICT investment is associated with complementary investments and changes in human
capital, changes in organisational structure, new work designs, and greater employee engagement (Black &
Lynch, 2002).
Arvanitis and Loukis (2009) summarise the ?New Firm Model? as one in which:
? Organisations replace the mass production model focusing on manufacturing with a flexible, multiproduct
approach emphasising quality and market responsiveness and taking advantage of technological
advances and new organisational forms (Milgrom & Roberts, 1990);
? There is a shift from ?tayloristic? organisation to ?holistic? organisation, characterised by job rotation and
learning across tasks (Lindbeck & Smower, 2000); and.
? Change is skill-based and requires complementary systems of ICT, workplace organisation, and
innovation (Bresnahan et al., 2002).
Arvanitis and Loukis (2009, p. 44) conclude that a ?common characteristic that is central in all these types of
studies is the existence of complementarities among several factors which mutually enhance their impact on firm
performance.? Principal complementarities are ICT, organisational practices, and human capital. However, in a
review of recent studies, Arvanitis and Loukis (2009) note that although most of these studies find a statistically
significant positive effect on performance for ICT and organisational capital (OC), only a few find a similar effect
for human capital (HC) and performance (see Table 1, p. 46). An exception is the Australian study conducted by
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Gretton et al. (2002) which finds ICT, OC, and HC to have a significant impact on business performance and
further finds evidence of complementarities between ICT and OC, and ICT and HC.
2.9.2. Types of ICT in the Workplace
The term ?ICT? was coined to mark the convergence of computing and communications. The Canadian statistics
office
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definition is, ?ICT includes technologies such as desktop and laptop computers, software, peripherals and
connections to the Internet that are intended to fulfil information processing and communications functions.? While
ICT refers to technologies, an information system (IS) comprises people and machines, and represents ?a set of
interrelated components that collect (or retrieve), process, store, and distribute information to support decision
making and control in an organisation? (Laudon & Laudon, 2008, p. ??). We are interested in ICT applications, i.e.
how ICT is used as part of a broader IS in an organisational context to some purpose.
ICT application types
We categorise ICT applications as follows:
? Enterprise – supporting business operations through specifying business processes (tasks and
sequences). These include enterprise systems such as SCM (back office) and CRM (front office), support
systems (e.g., self-service procurement via third party marketplaces and online employee services such
as expense claims), and generic business process management (BPM) technologies;
? Informational – supporting decision making for senior managers (strategise, scan environment, set
policies, allocate resources), middle management (carry out plans of senior management), and
operational management (monitor and control day-to-day operations). This will involve use of information
collected by enterprise systems and data warehousing, data-mining, and decision support technologies;
? Collaborative – facilitating interactions without specifying their parameters, without specifying tasks and
sequences, and use tends to be optional. Examples include email, instant messaging, wikis, blogs, social
networking sites, and mash-ups. These technologies form part of the Web 2.0 phenomenon and are
characterised by user generated content and collaboration giving power to individuals and communities;
and
? Functional – used to support the execution of discrete tasks. They include the use of spreadsheets,
simulators, CAD, and statistical software.
McAfee (2006) identifies four complements that are needed to use IT effectively: (1) better-skilled workers; (2)
higher levels of teamwork; (3) redesigned processes; and (4) new decision rights. Different types of ICT
application require different levels of complement, such that functional IT applications may not require
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http://www.statcan.gc.ca/pub/81-004-x/def/4068723-eng.htm
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complements while enterprise applications do require complements and are likely to involve organisational
change and generate resistance.
Web 2.0 Technologies
Web 2.0 technologies are being used increasingly in the workplace, particularly blogs, wikis, and social
networking sites (SNSs) (McKinsey, 2008). In a survey of nearly 2000 companies, McKinsey (2008) find that the
primary use of Web 2.0 is for managing knowledge and collaboration (internal applications), improving customer
service and acquiring new customers (interfacing with customers), and achieving better integration and tapping
into expert knowledge (interfacing with partners/suppliers). They identified the most significant barriers to Web 2.0
adoption in enterprises as: lack of understanding of potential financial return; a culture that does not encourage
the use of Web 2.0 technologies; and insufficient incentives to adopt or experiment with Web 2.0 technologies.
2.9.3. ICT Benefits
The benefits of ICT for a firm include (Arvanitis & Loukis, 2009):
? savings on inputs and general cost reductions
? greater flexibility and improvements in product quality
? savings on labour or on some specific labour skills
? reduction in capital needs through, for example, increased utilisation of equipment and reduction in
inventories or space requirements
? higher product quality
? better product development conditions
? increased flexibility of the production process
? allowing for the exploitation of economies of scale
? improved networking and communication between employees (reduced cost of lateral communication and
reduced coordination costs)
? improved monitoring, which can reduce the number of supervisors required in the production process
There are less tangible benefits from IT, such as:
? Internal/Management
o Employee morale, product development, organisational flexibility
o Improved planning, more timely information, improved decision-making
o Organisational learning/knowledge management
? External/Strategic
o New products and new channels to market
o Customer service, enterprise image, market development
o Create competitive advantage, build barriers to entry, enhance differentiation
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The survey will ask employees about their
perceived usefulness of the firm’s ICT and
infusion of ICT.
Perceived usefulness is the degree to
which a person believes that using ICT
enhances his or her job performance.
Infusion is how well an individual uses ICT
to enhance his/her productivity and gives
an idea of the extent to which the
potential of ICT to enhance work has been
exploited.
We hypothesise that high levels of ICT
perceived usefulness and infusion will be
positively associated with higher levels of
firm performance.
With respect to external/strategic use of ICT, Bergeron et al. (2001, 2004) developed a scale for assessing the
strategic use of IT. Their survey was conducted with SMEs and with the CEO as respondent, and these items
capture the potential benefits of ICT well.
Securing Benefits from ICT
There are numerous reasons why firms fail to get value from their ICT investments. We summarise these into
three areas: lack of attention to complementarities, poor fit of ICT and work practices, and poor governance. A
fourth factor needs to be considered: whether ICT is being used in an ethical way.
Complementarities: as noted above, achievement of these benefits does not arise from a simple technology
investment. It will likely require complementary investments in organisational capital and human capital, and
changes to organisational form and work design, particularly to secure the strategic benefits (e.g., the creation of
competitive advantage).
Work design: even when it is possible to railroad the ICT
into the organisation it may not be productive, despite
seeming a perfectly rational thing to do. This
problematical theme has been investigated by Sachs
(1995), who describes a case study of a Trouble Ticketing
System (a database for recording and scheduling jobs), in
which new technology and new working practices are
introduced. On the face of it, the new technology and
redesigned work processes should have led to gains in
efficiency. Unfortunately, in actuality, the opposite
happened – work became less efficient. The systems
analyst had failed to understand how the experienced
maintenance engineers shared their knowledge through
informal mentoring schemes, how knowledge was shared
through social interaction (the ?coffee machine? effect), and
how the new data entry requirements would slow productivity (Vidgen et al., 2002).
Governance: IT governance is the top management concern of controlling IT‘s strategic impact and its delivery of
value to the business, to manage oversight of cost and time, and to ensure that IT plans change as circumstances
change (Weill & Ross, 2004). Organisations with appropriate governance structures, such as an IT steering
committee, perform better than those that don‘t (Weill, 2004).
Ethical use of ICT: even if the complementarities and fit with work practices are addressed there remains the
question of whether the use of ICT is fair and ethical. Greenbaum (1995, p. ??), in ?Windows on the Workplace?
reports on call centres,
There‘s AHU, that‘s After Hang Up time. It‘s supposed to be fourteen seconds. It just came down to
thirteen. But my average is five seconds AHU, because I do most of the work while the customer‘s still on
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the phone. There‘s your talk time, your availability, your occupancy - that‘s the percent of time you‘re
plugged in, which is supposed to be 98 percent.
Although intensification of work through the use of ICT is not necessarily a ?bad? thing (indeed, it may lead to
more fulfilling work for the individual and increased productivity for the firm), there is a potential for ICT to erode
worker autonomy. For example, the UK‘s Guardian newspaper‘s (28 January 2006) investigation into call centres
reported,
At scrupulous companies such as Converso, the cold callers have control over their auto-diallers. They can
press a pause button whenever they like and stretch their legs or whatever. But at crueller companies the
auto-dialler is like a runaway train: there is no pause button, no respite, one must cling on or die. … After
six months of the auto-dialler you just want to shoot yourself in the head.
The inappropriate intensification of work through the use of ICT will likely contribute to workplace stress and have
a negative impact on employee quality of life.
2.9.4. Levels of ICT Investment
A simple measure of the IT input for a firm is the IT expenditure per employee (Byrd et al. 2006). As to what
constitutes expenditure, Huang et al. (2006) define IT Investment as the sum of hardware expenses, software
expenses, maintenance expenses, training expenses, and personnel expenses. Dibrell et al. (2007) used a four-
item scale that asked respondents to report their (1) total dollar value of IT assets; (2) total IT investment; (3)
number of IT employees; and (4) number of personal computers and terminals per employee.
Youndt et al. (2004) provide a more sophisticated view of the ICT investment, looking at measures such as the
percentage of employees with desktop computing and the percentage with access to the Internet.
2.9.5. Strategic Alignment
The Society for Information Management (SIM) commissions a survey on a regular basis to discover the key
management concerns of Chief Information Officers (CIO). The alignment of IT and business has been a
consistent high scoring item and was ranked number 1 in 2003, 2004, 2005, and 2006, and was the second most
important issue in 2007 (Luftman et al., 2006; Luftman & Kempaiah, 2008).
Chan (2002, p.??) defines strategic alignment as ?the fit between the priorities and activities of the IS function and
the business unit? and say that the goal in strategic alignment is for ?IS priorities, capabilities, decisions, and
actions to support those of the entire business.? When Campbell (2005) asked the participants of a focus group to
define alignment, the deceptively simple response was ?Alignment is the business and IT working together to
reach a common goal.? The term ?fit? is also used extensively, from Henderson and Venkatraman (1993) on.
Shams and Wheelers‘ (2003, p. 66) definition captures the intertwinedness of business and IT of alignment as,
?convergent intentions, shared understanding, and coordinated procedures?. Chan and Reich (2007a, 2007b)
provide an extensive overview of the research into alignment.
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Byrd et al. (2006) find evidence for strategic alignment as a moderating affect on the relationship between IT
investment and firm performance.
2.9.6. User Satisfaction and ICT
There is a substantial body of literature on user satisfaction with IT and user acceptance of IT, notably Davis‘
(1989) technology acceptance model (TAM), which is grounded in the theory of planned behaviour and more
latterly the theory of planned action. The IS success model developed by DeLone and McLean (1993) identify
multiple dimensions of IS success - information quality, system quality, and service quality – and their impact on
user satisfaction.
A fundamental aspect of the TAM is that people use IT because it is perceived to be useful in their job or role. The
UTAUT (Venkatesh et al., 2003) attempted to unify the various TAM variants and identifies further factors that
affect IT adoption, including social influence (do others in the organisation encourage the use of the technology)
and facilitating conditions (does the user have the resources and knowledge to deploy the technology).
ICT infusion
Sundaram et al. (2007) identify three constructs relevant to individual perceptions of ICT:
? Frequency: how frequently an employee uses ICT
o i.e., how often an employee uses ICT
? Infusion: the extent to which the full potential of ICT is embedded in an organisations managerial and
work systems
o i.e., how well an employee uses ICT
? Routinisation: the extent to which ICT has been integrated into the employee‘s normal work routine
o i.e., how efficiently an employee uses ICT
Whereas the TAM is concerned with future intentions to use technology, the infusion model is concerned with how
well the technology is working for the user. In the context of high performing workplaces an indication of the extent
of ICT use by employees and whether that ICT is helpful in performing work should be particularly relevant.
2.9.4. Virtual Workplaces
Crandall and Wallace (1998, p. 19) define the virtual workplace as, ?where work is done anytime and anywhere,
and not bound by the traditional limitations of time, physical space, job descriptions, title, and pyramidal reporting
relationships?. Akkirman and Harris (2005) take this as providing the flexibility to work at any time and in any place
through information and communication technologies. The virtual workplace includes telecenters, teleworking,
hot-desking, hotelling, and virtual offices, For many, the virtual workplace is an increasingly preferred and
ubiquitous workplace (Akirrman & Harris, 2005). Effective communication is essential to organisations – poor
communication correlates with lower commitment, reduced productivity, increased absenteeism, and higher
turnover (Hargie et al., 2002). Staples (2001) finds that employees in a virtual workplace had lower levels of job
satisfaction and trust that could be attributed to poor communication.
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Akkirman and Harris (2005) compared virtual and traditional office workers in terms of personal feedback,
communication climate, relationship with supervisors, horizontal and informal communication, and organisational
integration, and overall communication satisfaction. Counter to expectation, the results showed that virtual
workers had higher levels of communication satisfaction than traditional workers.
2.9.5. Conclusion and Recommendations
The survey will ask employees about their perceived usefulness of the firm‘s ICT and ICT infusion. Perceived
usefulness is the degree to which a person believes that using ICT enhances his or her job performance. This
construct is applicable to all employees, regardless of the type of ICT they use and their role or level in the
organisation. We hypothesise that high levels of perceived usefulness of ICT will be positively associated with
higher levels of firm performance. The construct will also give an idea of how well the ICT fits with the actual work
practices of employees. ICT infusion gives an idea of the extent to which the potential of ICT to enhance work has
been exploited, i.e., how well the employee uses ICT. We hypothesise that high levels of using ICT well will be
positively associated with higher levels of firm performance.
The CFO survey will ask about levels of financial ICT investment (annual ICT budget) and request further details
of non-financial investment indicators, like the percentage of employees with desktop computing devices, and the
number of people in the IT department. The CFO will also be asked to assess the extent and quality of the firm‘s
ICT provision and to assess the types of technology used, and their relative importance to the firm (such as
communication software, enterprise systems). From a strategic perspective the CFO will be asked how ICT is
used in the firm (e.g., to save cost, to improve product quality) and how ICT strategy and business strategy align.
We hypothesise that a higher level of ICT investment, aligned with business strategy, will be positively associated
with a higher level of firm performance.
Although the bulk of the ICT questions are directed toward the CFO, the HR Manager will be asked what
percentage of employees are virtual workers. High levels of virtual working will require higher levels of ICT
investment and ICT effectiveness.
2.10. Factors that Can Moderate Firm Performance
There are a number of factors that can moderate the type and/or effectiveness of high performing workplace
practices. Workplace practices can, for example, vary depending on industry size, maturity of the market, industry
sector, ownership structure, firm strategy etc.
Furthermore, the industry sector can affect the effectiveness of different workplace practices. A report funded by
the Department of Trade and Industry in the United Kingdom examined the results of ten case studies of high
performance work practices and found evidence that some of the ?bundles? of high performance practices work
better than others in generating specific outcomes (Sung & Ashton, 2004). In addition, different ?bundles? of
practices are more or less appropriate to different sectors to achieve business outcomes. For example,
companies in the financial services sector experienced superior results using financial incentives, whereas in
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Firm performance is moderated by
firm demographics. In this study, we
consider the moderating effects of
things such as:
• Industry / Age / Size
• Locations / Ownership
structure / Foreign ownership
• Competitors / Exports
(globalisation) / Imports
• Industry dynamics /
Uncertainty / Use of sub-
contractors.
manufacturing and business services success was reported through high involvement practices such as
decentralisation of decision making and the use of teams (Sung & Ashton, 2004).
In the service sector, high performing workplace practices can be expected to vary enormously because service
industries, and competitive segments within them, cover a huge
range of business models (Boxall & Macky, 2009). At one
extreme, prices are kept low through low-skilled work and
through labour-saving technology (such as self serve
checkouts at large grocery outlets like Big W) while, at the
other extreme (professional services), firms largely compete
through complex knowledge which is customised to specific
client needs and circumstances (Boxall & Macky, 2009). What
this means is that the specific sector within the service industry,
and indeed the particular job, are important variables to be
considered in determining which practices, or bundles of
practices, produce high performing workplaces. For example, in
professional services, tasks rely on discretionary judgement
and team meetings that pool expert knowledge. Bundles of
practices that support knowledge acquisition, autonomy and teams are likely to produce strong effects.
Additional complexity is that there are firms in the service sector that provide mass and customised service that
require different business strategies. Cogin and Williamson (2010) argue that organisations adopting a particular
business strategy require HRM practices that are different from those required by firms espousing alternative
strategies. Cogin and Williamson (2010) provide compelling evidence that organisations that have greater
alignment between their HRM practices and their strategy will enjoy superior performance.
For illustrative purposes, in the following section, we provide an example of the complex relationships between
different types of business strategy and HRM practices. Referring to Porter's strategy types, Schuler and Jackson
(1987) classify business strategies into three types and designate different types of employee behaviour and HRM
methods for each competitive strategy, as follows:
? A cost reduction strategy involves enhancing competitiveness by lowering the prices of products or
services. This method enhances production efficiency and reduces expenditures by adopting new
technology, enlarging the scale of production, or re-engineering production processes, so that a business
can sell its products or services at a lower price in the market. Businesses that prefer a cost-reduction
strategy must rigorously control and minimise expenses and strive for greater economies of scale.
According to Dowling and Schuler (1990), the most appropriate HRM strategy in this context would include
recruitment of employees from the external labour market. The selection of employees should focus on their
ability to begin work immediately and minimisation of training expense. The job content of such workers is
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definite, career development focuses on specialisation, performance evaluation emphasises the short-term
and the individual, pay is based on external equity with other workers, and bonuses and other monetary
incentives are rare. Because worker recruitment emphasises technological ability and organisational
requirements, job security is poor (Dowling & Schuler, 1990).
? Innovation strategy emphasises the development of products or services that are unique or different from
those of competitors. Businesses adopting an innovation strategy must be prepared to adapt to rapid market
change and technological progress. Employees need to be creative; to be cooperative with each other; able
to pursue long-term objectives; devote proper consideration to the quality and quantity of products and
services provided; and be able to take risks and cope successfully with ambiguity and uncertainty.
According to Schuler (1988), the HRM strategy needs to develop employees with these qualities; job
descriptions should be broad, employee interaction strongly encouraged, career options should be
extensive, training and career development emphasised, pay scales based on internal equity, there should
be excellent job security, and performance evaluations need to stress team work and a long-term orientation
(Dowling & Schuler, 1990).
? Quality enhancement strategy achieves success by offering a standard of quality superior to that of other
products or services. Those businesses adopting a quality-enhancement strategy must make frequent
changes in the production process in order to continuously upgrade product quality. This type of strategy
requires a culture of employee involvement and organisational flexibility. Employees are required to engage
in predictive and repetitive behaviour, to cooperate closely with others and make a strong commitment to
organisational goals (Dowling & Schuler, 1990).
As can be seen, HRM needs to be aligned to influence employee attitude and behaviour in a way that helps a
business achieve its competitive strategy. For example, a firm implementing practices that encourage employee
behaviour consistent with its business strategy will achieve superior performance (Cogin & Williamson, 2010;
Delery & Doty, 1996). Chang and Huang (2005) tested Pfeffer‘s (1999) universal HRM practices in Taiwanese
firms and found no support for a one-size-fits-all approach, but that an innovative product market strategy did
moderate the relationship between HRM practices and organisational performance. The concept of ?fit? refers to
the coordination and alignment of high performing workplace practices and business strategies in ways that will
assist lift performance.
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3. Barriers to High Performing Workplace Practices
Attempts have previously been made to implement high performing workplace practices into workplaces around
the world. In the United States, the America’s Choice Report (1990) and the New America Workplace (1994) both
put forward suggestions on how to lift workplace performance. In Australia, the Karpin Report (1995), the
Australian Workplace Industrial Relations Survey (1990, 1995), and the Best Practice Demonstration Program
(Rimmer et al., 1997) similarly made various recommendations. Several reasons have been suggested as to why
such recommendations were not successful. In Australia, a loss of commitment due to a change of Government
may have played a role.
In this section, we identify some of the possible barriers to ?higher performance?, drawing on research from,
among others, the United Kingdom report Engaging for Success: Enhancing Performance through Employee
Engagement (MacLeod & Clarke, 2009).
Based on a brief review of secondary literatures, we find four key problems or barriers: a Knowledge Problem; an
Implementation Problem; an Unwillingness by Managers to Relinquish Control; and an Accountability Problem.
3.1. A Knowledge Problem
According to MacLeod and Clarke (2009), some leaders are not aware of the issue of employee engagement
while others do not believe it to be worthwhile. Meanwhile, some managers and leaders are not fully aware of
or do not fully understand, the concept or what benefits it might bring to their organisations. In the course of
their study, while talking to business leaders, MacLeod and Clarke (2009) found widespread ignorance of the
concept of employee engagement or the potential benefits it could bring to their firms. This finding is supported
by a recent report from Accor who claim that 75 percent of leaders have no engagement plan or strategy
despite 90 percent agreeing that engagement does impact on the chances of business success. This lack of
comprehension at the most senior level is echoed by Accenture‘s finding that over half of Chief Financial
Offers it surveyed had a minimal understanding of the return on their investments in human capital. In addition,
a further 30 per cent understood it to a modest level and only 16 per cent demonstrated a considerable
understanding.
One recommendation from the Macleod and Clarke report is for a nationwide effort to raise the profile of the
issue and to increase the availability of practical support.
3.2. An Implementation Problem
A second barrier identified by MacLeod and Clarke (2009) suggests that even if some employers are interested in
what employee engagement could offer, they often do not know how to address or action the subject within their
organisations:
Uncertainty over engagement is also reflected in a fear that engagement might be seen as too ?soft and
fluffy? or as ?not the British way?. As the law firm Freshfields Bruckhaus Deringer told us, when they
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introduced their groundbreaking engagement strategy for legal associates, ?we could have come at it
from a fluffy approach, but it wouldn’t have worked. So we put the performance metrics up front (MacLeod
and Clarke, 2009, p. 67).
Spreitzer and Quinn (2001) point out another impediment; the search for short term results by business. This is
set against the fact that creating a high performing workplace is a cumbersome, challenging and ambiguous
process that takes time and cannot be done in a six months period by following a five-step plan. The long-term
approach necessary for successful empowerment implementation efforts appears at odds with a business
environment that requires quarterly results. This long-term approach is especially difficult as leadership transitions
bring frequent changes to the vision for the organisation. ?Quick fixes? advocated by ?management gurus? in
simple to understand five step programs might be popular, but cannot be realistically expected to succeed in
modern organisations replete with complexity, ambiguity, messiness and the rapid rate of change that is common
today (Spreitzer & Quinn, 2001).
3.3. An Unwillingness to Relinquish Control
Relinquishing control and letting go of the Taylorist work model that we have been brought up to believe in
represents a third key barrier. Once again, Spreitzer and Quinn (2001) make important observations, this time
regarding the unwillingness of managers to trust in the idea of surrendering some of their power. This
unwillingness is partially due to concerns that relinquishing control increases the number of unknowns and hence
the potential for failure. At the heart of this concern resides scepticism as to subordinates‘ capacity to handle
?managerial? responsibilities and whether newly empowered subordinates will have the necessary levels of
organisational commitment. There is also some fear about who will carry responsibility for any errors that might
appear after this ?empowerment?.
The Accor report (2008, p. 19), although not an academic text, does make an interesting point in that it explains
that ?the issue seems to lie in their (manager‘s) unwillingness to talk the talk and truly relinquish command and
control styles of leadership in favour of a relationship based on mutuality.? A similar situation was found in a study
by Hales (2005) of first line managers, which found that supervisory duties remained much in evidence and that
devolution of responsibility to teams was rare.
Interestingly, even if middle managers become convinced of the need for change they can still run up against
barriers in the shape of the most senior managers. A study by Alimo-Metcalfe et al. (2008) found that after
managers had been trained with a clearer idea of what leadership looked like, their suggestions for improvement
were rejected or ignored by their somewhat defensive and/or reactionary bosses.
Conditioning and the history of the workplace also play a significant role in creating the cultural norms we find in
firms. As such, barriers to large scale change need to address issues about the human psyche and condition of
self and ego.
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3.4. Accountability and Measuring Value Creation
Finally, an obsession with targets can ?infect? managers‘ behaviours and detract from their ability to interact
effectively with their staff. John Oliver (2009), the former Managing Director of Leyland Trucks, explains (in
MacLeod & Clarke, 2009, p. 69),
Ninety-nine per cent of failure to engage staff is down to management behaviour. The management
paradigm which introduced management by objectives and KPIs [key performance indicators] changed
the whole way of thinking around good and bad management. Managers often focus on what they are
judged on i.e. KPIs. They give the impression on the shop floor that they are much more concerned with
outputs than people. There is less humanity and more mechanistic behaviour despite superficial
friendliness and a ?call me Dave‘ type lack of formality with staff; I call this kind of manager the ?friendly
automaton…
Philip Whitely of the Human Capital Forum is reported as saying that what is required is ?a Copernican shift,
ditching the centuries old dominance of accountancy as the way of understanding the organisation.?(cited in
MacLeod & Clarke, 2009, p.67).
While these various statements may be somewhat sceptical, it is true to say that more can be done to ensure that
accounting better reflects, profiles and permits visualisation of the process of value creation in order to lift
workplace performance. This does not suggest that KPIs are a bad thing, merely that pursuit of targets without
consideration of the way that they are achieved and what they stand for heavily impact upon employees and
managers alike, and can result in the wrong behaviour. The Global Financial Crisis has been one example of
obsessions with financial returns having severe implications worldwide.
This also raises a range of interesting questions: What do we encourage students in the class room and
managers at work to believe in? Do workplace practices and our current management education curricula focus
too much on managing by objectives and short term financial outputs? Do we place sufficient emphasis on
building sustainable organisations that ensure long term value creation and maximises the potential and
contributions of all employees?
The research that forms part of this project (specifically the forthcoming phase in 2010 that pilots intervention
strategies to lift workplace performance) will examine in more detail the barriers to the uptake of high performing
workplace practices in Australia.
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4. Background to the Development of the Surveys
This section provides background information to the development of the surveys. It reviews some of the largest
and most influential workplace and management surveys done in Australia and internationally; comments on
research design; and discusses the suggested research methods.
4.1. Review of Existing Workplace and Management Surveys
A number of workplace and management surveys have been conducted internationally by national governments
and others in recent years. Many of these have investigated the relationships between management practices,
innovation and productivity growth. The aim of this section of the report is to review some of the most
comprehensive and relevant workplace and management surveys.
Table 8 overleaf provides a comparative summary of the surveys being reviewed. It details the:
? General Survey Information: States the country, survey name and sponsoring organisation.
? Research Aims: States the aims of the research.
? Theoretical Basis: Identifies the theory that has informed the survey.
? Research Instrument: Discusses the research instrument, including the measurements used.
? Research Method: Discusses how the data was collected and analysed.
? Major Findings: Summarises the key research findings.
Four observations can be made about the surveys reviewed, as follows:
1. Descriptive versus Analytical
The surveys split into two categories: descriptive and analytical. The purely descriptive surveys include
surveys such as the 1995 Australian Workplace Industrial Relations Survey (AWIRS), the UK Workplace
Employment Relations Surveys (WERS), and the United States Federal Human Capital Survey. These
surveys provide descriptive information that in subsequent studies has been used longitudinally or
combined with statistics from other sources to demonstrate relationships and further explore the impacts
of certain management practices on, for example, economic performance. Their primary purpose,
however, has been to facilitate observations about the status of and changes in workplace relations over
the past two decades.
More recent workplace surveys tend to be more analytical in nature and focus principally on the
relationship between productivity and management practices employed in firms, industries or nations.
These analytical surveys are beneficial because they help identify those workplace practices that result in
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higher levels of innovation and productivity, and these can be used to improve policy and practices inside
firms.
2. High Performing Workplace Practices; Opportunities to Broaden Insights and Understandings
High performing workplace practices are diverse and originate from different disciplinary areas ranging
from general management, human resources managements and organisational behaviour to performance
measurement and industrial relations. Some of the more common areas of research inquiry in the
surveys reviewed here include:
? Performance measurement and evaluation of people and business processes (e.g. Black & Lynch,
2004; Flood et al., 2007; Bloom et al., 2007; Green et al., 2009);
? Recruitment, promotion and compensation practices, structured around, for example, merit and
incentives (e.g. Black & Lynch, 2004; Flood et al., 2007; Bloom et al., 2007; Green et al., 2009);
? Workforce diversity and equal opportunity employment (e.g. Flood et al., 2007);
? Organisational design, including job-rotation, employee participation and organisation of workers in
teams (e.g. Arundel et al., 2007; Flood et al., 2007; Black & Lynch, 2004);
? Communication and access to strategic information (Flood et al., 2007);
? Learning, training and development, including multi-skilling (e.g. Arundel et al., 2007; Flood et al.,
2007; Black & Lynch, 2004).
Relationships that have been less thoroughly explored include the relationship between leadership and
high performance; governance (including board monitoring) and high performance; and management
controls and high performance (including innovation). In this study, we intend to broaden the analysis to
include a greater focus on leadership, culture, governance, and management controls. This will widen the
analysis of what drives firm performance beyond the more traditional areas (such as organisational
design, industrial relations, and training and learning). Doing so will shed new light on the multiple
linkages between management practices and performance for the benefits of practitioners and policy
makers alike.
3. Consistency in Findings: Management Practices are a Key Determinant of Productivity and
Innovation
The surveys reviewed consistently show a positive relationship between management practices and
productivity. This is consistent for studies that cover large number of firms of varying sizes and in various
industries across seventeen countries (in Europe/ UK/ Asia/ North America (Bloom et al., 2007), in Ireland
(Flood et al., 2008), in the United States (Black & Lynch, 2004), and in Australia (Green et al., 2009).
Arundel et al. (2007) focus specifically on innovation and find that certain management practices can lift
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innovation levels. Specifically, when work is organised to support high levels of employee discretion in
solving complex problems, firms tend to be more active in innovation.
4. Limited Insights into Management Practices and Productivity in Australia
Last, Table 8 shows that significant progress has been made internationally at researching and
?unpacking? the relation between workplace practices and productivity. Yet, in Australia, the last national
survey of workplace and management practices was done in 1995 (see the Australian Workplace
Industrial Relations Survey, Morehead et al., 1997). Aside from the work of Green et al. (2009), Australian
efforts have languished, and little has been done on a national or cross-sectoral scale since 1995.
Bloom et al. (2007, p.10) explain that it can be in a nation‘s interest to refocus its policy efforts on the
opportunities to grow workplace productivity by improving management practices,
Governments can play their part in encouraging the take-up of good management behaviour.
Doing so may be the single most cost-effective way of improving the performance of their
economies. Strong competition and flexible labour markets both lead directly to improved
management performance. Multinational companies have a strong positive effect and their
influence is felt throughout the regions in which they operate. Relentless improvement in
educational standards is also essential. Better-managed firms need more highly skilled
workers and they make better use of them, while better managers will be a key component of
the performance transformation that both established and emerging economies must
undertake if they are to maintain and improve their global competitive position.
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Table 8: Review of Workplace Surveys
Survey Research Aim
Robustness
Major Findings
Theoretical Basis Research Instrument Research Method
Ireland
High Performing Work
Systems in Ireland
National Centre for
Partnership and
Performance
Flood, et al., 2008
Investigates the
relationship
between a suite of
management
practices, and
innovation and
productivity.
The management
practices were
grouped under the
headings of:
? Strategic HR
management
? Partnership
between firms
and workers
? Diversity and
equality, and
? Flexible working
conditions.
The unit of analysis
was ?the firm?.
The methodology
draws on previous
research by the
National Centre for
Partnership and
Performance,
including Flood et
al. (2005).
Measures include a
mix of self-reported
facts and perceptions
by General Managers
and HR Managers,
along with performance
variables describing
labour productivity,
workforce innovation
and employee
turnover.
Sample drawn from
?The Irish Times Top
1000 Companies?
database (1005
contacted).
Two survey
instruments were
issued: directed
respectively at the HR
Manager and the
General Manager.
N = 132 (respondents
that completed both
the General Manager
and HR Manager
surveys).
Descriptive statistics
and four regression
models used in
reporting.
Companies adopting high
performing workplace
systems showed a:
? 14.8 per cent increase
in labour productivity
(equivalent to over
€44,000 per employee
or €12 million per
median company of 270
employees)
? 12.2 per cent
improvement in
workplace innovation
(equivalent to over
€2,000 per employee or
over €500,000 per
median company)
? 7.7 per cent reduction
in employee turnover
(equivalent to retaining
2 additional employees
per median company)
International study
in 16 countries in
Europe, North
America and Asia.
Management Practice
and Productivity: Why
They Matter?
London School of
Economics (LSE)/
McKinsey & Co.
Investigates the
relationship
between
management
practices and
workplace
productivity.
The management
practices were
grouped under the
headings of:
? Operations
Relies on a
methodology
created by LSE in
2004 and used with
over 4,000
respondent firms to
date.
Measures involved
score perceptions of 18
dimensions of
management practice
across the three
categories. Scores
were based on a set of
pre-determined criteria
grading practices in
each dimension from
best to worst.
Quantitative
performance data was
Validity established
with extensive
database of historical
results, including
similar correlations
calculated in 4,000
firms, in 16 countries.
Method based on
structured
conversational
interviews with senior
managers.
?A single point increase in
management practice
score is associated with the
same increase in output as
a 25 per cent increase in
the labour force or a 65 per
cent increase in invested
capital? (p.5)
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Bloom, et al., 2007 ? Performance
? People
The unit of analysis
was ?the firm?.
also collected and
used in analysis.
Descriptive statistics
and correlation
analysis.
Australia
Management Matters
in Australia: Just How
Productivity Are We?
Department of
Innovation, Industry,
Science and
Research.
Green, et al., 2009
Investigates the
relationship
between
management
practices and
workplace
productivity.
Benchmarking
Australia against
15 other countries.
The management
practices were
grouped under the
headings of:
? Operations
? Performance
? People
The unit of analysis
was ?the firm?.
As the Australian
limb of the above
LSE/McKinsey
study, replicates its
methodology.
Validity established in
similar surveys of
4,000 respondents in
Europe, North
America and Asia and
inferred for Australia.
Extensive database of
historical results.
Method based on
structured
conversational
interviews with senior
managers.
N= 439 medium and
large-sized
manufacturing firms
(50 to 5,000
employees).
Descriptive statistics
and correlation
analysis.
?The relative level of firm
output associated with an
increase of a single point in
the management score is
equivalent to a 56 per cent
increase in the labour force
or a 44 per cent increase in
invested capital? (p.13).
The worst category of
management practice for
Australian firms was
?People Management? *,
especially the management
of performance and talent.
This area presents the
greatest opportunity for
improvement, when
compared to the 15 other
countries.
* ?People Management?
covers instilling a talent
mindset, addressing poor
performance, attracting,
retaining, rewarding and
promoting high performers.
United States
What’s Driving the
New Economy? The
Benefits of Workplace
Innovation
Black and Lynch,
2004.
To identify the
component of US
productivity growth
(1994 to 1997) that
is attributable to
management
practices.
The unit of analysis
Together with
Black and Lynch
(2001) is informed
by an extensive
literature review.
Applies
sophisticated
econometric
Secondary analysis of
data collected in two
rounds (1993 & 1996)
of the Educational
Quality of the
Workforce (EQW)
National Employers
Survey, administered
by the US Bureau of
The study used panel
data which is a subset
(N=766) of two
surveys conducted in
1993 (N=3000) and
1996 (N=2479) by the
Bureau of the
Census, with site or
plant managers as
Up to one-third of US output
growth in the period 1993 to
1996 stemmed from
productivity enhancing
innovations at the
workplace level, such as re-
engineering of processes,
job-rotation and organising
workers in teams.
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was the workplace. analysis to US
Bureau of Labour
Statistics data.
the Census.
Survey responses
captured quantitative
financial and
production data as well
as details of
management practices
such as recruitment
and utilisation of
education and training
investments.
the target
respondents.
The sampling frame
comprehensively
covered all firms with
>20 employees, as
maintained by the
Bureau and captured
establishments that
employ >75 per cent
of US workers.
Surveys response
rates were 75 per
cent and 74 per cent
respectively.
Descriptive statistics
and econometric
analysis.
United States
Federal Human
Capital Survey, 2006
Combined with two
previous surveys,
is a longitudinal
study of HR
management
effectiveness in
US government
agencies,
focusing on four
areas including:
Leadership and
Knowledge
Management
(indicates the extent
to which employees
hold their leadership
in high regard, both
overall and on
specific facets of
leadership).
This is not evident
from related
publications.
The survey instrument
is designed to collect
the self-reported
perceptions of
employees of
government agencies.
No other data is
collected, nor are
relationships between
the data and other
measures analysed.
Sampling frame is all
full-time employees of
all US government
agencies.
436,000 employees
were randomly
selected and sent the
electronic survey
instrument.
220,000 responses
were received.
The survey was
conducted via an
online survey with a
six stage Likert scale
(including ?Do not
know? alternative) to
collect responses.
Analysis focuses on
descriptive statistics
only.
The responses have been
tabulated and compared
with similar responses in
prior surveys in a
longitudinal commentary.
The reported highlights
include that over three
quarters of respondents
believe their work is
important, have the
knowledge and skills to get
the job done, know how
their work relates to the
agencies‘ goals and
priorities, gain a sense of
accomplishment from their
work, but do not believe that
there is a link between
performance and pay rises.
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Results-Oriented
Performance
Culture (indicates
the extent to which
employees believe
their organisational
culture promotes
improvement in
processes, products
and services, and
organisational
outcomes).
Talent
Management
(indicates the extent
to which employees
think the
organisation has the
talent necessary to
achieve its
organisational
goals).
Job Satisfaction
(indicates the extent
to which employees
are satisfied with
their jobs).
The unit of
analysis is the
employee.
Europe
How Europe’s
economies learn: a
comparison of work
organisation and
innovation mode for
the EU-15
Arundel et al., 2007
Investigates the
link between the
organisation of
work and
innovation,
explored through
national data
pertaining to each
of the EU-15
countries.
Informed by
literature reviews of
?high performance
work system?
focused on the
relationship
between
organisation of
work and
innovation.
Secondary analysis of
data collected in two
surveys: the Third
European Survey of
Working Conditions
(ESWC) in 2000
(based on self-reported
perceptions during
face-to face interviews
in respondents‘ homes)
and the third
Sample size = 8,081
salaried employees in
firms of over 10
employees (a subset
of the respondents to
the ESWC survey).
Used 15 binary
variables for work
organisation and
tasks to classify
employing firms within
The study found that
innovation rates are highest
in the Learning
Organisation, which
facilitates interaction
between people with
diverse skills and
competencies and which
has high levels of learning
and employee discretion in
problem solving.
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The unit of analysis
was the firm.
Community Innovation
Survey (CIS-3) for
innovation activities of
respondent firms
between 1998 and
2000 (based on self-
reported facts and
perceptions)
a 4 part taxonomy of :
- Discretionary
Learning
- Lean Production
- Taylorism; and
- Traditional
Organisation.
Also developed a 3
part taxonomy of
innovation mode to
classify CIS-3
respondents as:
- Lead innovators
- Technology
modifiers
- Technology
adapters
Analysis focussed on
cross-matching of
results within each
EU-15 country.
?…in nations where work is
organized to support high
levels of discretion in
solving complex problems,
firms tend to be more active
in terms of innovations
developed through their
own in-house creative
efforts.? (p.1202)
?...learning and interaction
within organisations and at
workplaces are at least as
important for innovation
performance as learning
through interaction with
external agents.? (p. 1202)
Australia
The 1995 Australian
Workplace Industrial
Relations Survey
(AWIRS) (first run in
1990)
Morehead et al., 1997
To provide
comprehensive
and statistically
reliable nationwide
data on workplace
relations as well as
complementing the
similar 1990
survey, facilitating
analysis of change.
Unit of analysis
was the workplace.
Greatly informed
by UK precedents
– WERS 1980,
1984 and 1990.
Method based on 1990
survey, collecting self-
reported perceptions
and facts via structured
questionnaires (where
respondents pick an
answer from a list).
Four survey
instruments:
- Main (focussed on
activities, structure and
processes used in
workplaces)
- Employee (focussed
on attributes of
employees and their
workplace
Main survey:
N =2001 workplaces
with >20 employees.
Sample frame =
Australian Bureau of
Statistics register of
all establishments in
Australia. Data
collection based on
face-to-face
interviews with
General Manager,
manager responsible
for employee relations
and union delegate.
Employee survey:
N = 19,155.
Sample frame = those
employed at the
Noted a higher incidence of
managers using structures
and formal procedures to
manage employees than in
1990.
Unions lost influence at the
workplace level both
through a declining
presence and, where
present, a declining level of
activity overall.
Union Delegates, where
present, were increasingly
likely to be involved in key
issues (such as negotiating
wage increases).
Despite considerable
130
experiences)
- Small business (focus
similar to Main Survey)
- Panel (focussed on
gleaning detail of
changes between 1990
and 1995 Main
Surveys)
2,001 workplaces
used for the Main
Survey. Data
collection based on
self-completion
questionnaire.
Panel Survey:
N = 698
Sample frame = those
workplaces that
responded to 1990
Main Survey. Data
collection based on
face-to-face
interviews.
change to the context of
industrial relations during
the first half of the 1990s
(e.g. decentralisation of
wages system, enterprise
bargaining, declining union
membership), there were no
radically different outcomes
in terms of workplace
industrial relations.
United Kingdom
Workplace
Employment
Relations Survey
(WERS) (2004)
Precedents of WERS
2004 were run in
1980, 1984 and 1990.
Department of Trade
and Industry (and
others, see Kersley et
al., 2006)
To map workplace
relations over time
(fifth survey in the
series which
started in 1980), in
order to inform
policy development
and provide a
statistically reliable
set of data to
inform research,
debate and
practice.
Unit of analysis
was the workplace.
Primary aim to
maintain
consistency in
design and scope
with previous
surveys, to assist
longitudinal study.
Some
modifications were
driven by input
from user groups
and recognise
changes in
legislative and
social context.
4 survey instruments in
2 divisions:
1. Cross-section
survey with 3
components:
1. Managers Survey -
focussed on
activities, structure
and processes used
in workplaces.
2. Employee
representative
survey – focus as
above.
3. Employee survey -
focussed on
attributes of
employees and their
workplace
experiences.
2. Panel Survey
- respondent =
1. Managers Survey
N =2,295.
Response rate = 64
per cent
Sample frame = all
UK workplaces with
>5 employees.
2. Employee
representative
survey N=984
Response rate = 77
per cent
Sample frame =
workplaces included
in managers‘ survey.
3. Employee survey:
N = 22,451.
Response rate = 61
per cent
Sample frame = 25
randomly selected
employees at 76 per
cent of the
workplaces used for
the Managers‘ survey.
During the period from 1998
to 2004 there was:
? Continued decline in
union membership and
presence during the
period.
? Substantial increase in
the availability of
flexible working
arrangements, such as
flexi-time and job-
sharing
? Very little change in the
practices and outcomes
of employment relations
in the UK.
131
manager
- focussed on gleaning
detail of changes
between 1998 and
2004 Cross-section
Surveys
All questionnaires
sought a mix of self-
reported perceptions
and facts.
Panel Survey:
N = 938
Response rate = 75
per cent
Sample frame =
randomly chosen
from subset of cross-
section survey
respondents with >10
employees and
present in 1998
survey.
In all cases other than
the employee survey,
method based on
face-to-face interview,
using a structured
questionnaire.
Employee survey
based on self-
completion
questionnaire.
United Kingdom
High Performance
Work Practices:
linking strategy and
skills to performance
outcomes.
Department of Trade
and Industry (DTI)
and Chartered
Institute of Personnel
and Development
(CIPD)
Sung and Ashton,
2005
The aims of the
survey were to
establish how high
performance work
practices have
been utilised in the
UK and the
identification of
various
organisational
outcomes, both
financial and non-
financial.
Ten case studies
were also
undertaken to
demonstrate good
practice and
The study was
informed by
literature in the
areas of high
performance and
high involvement
work practices and
their relationship to
performance
outcomes.
The measures used in
the survey were the
respondents‘ self-
reported facts (on
practices implemented)
and perceptions of
non-financial
performance
outcomes.
The ten case studies
collected demographic
and financial statistics
as well responses in
semi-structured
interview regarding
high performance work
practices
implementation and
The frame for the
survey sample was
the membership base
of the CIPD.
The sample was
6,000 members
chosen at random.
N = 294, a response
rate of 5 per cent.
Questionnaires were
sent out to the sample
for self-completion.
The frame for the
case studies was
?The Sunday Times
100 Best Employers
The more high performance
workplace practices
(HPWP) an organisation
uses, the more effective it is
in delivering adequate
training provision,
motivating staff, managing
change and providing
career opportunities.
The more HPWPs an
organisation uses, the lower
the staff turnover.
Identification of three
bundles, or groupings of
HPWPs that are positively
correlated with various
organisational outcomes,
132
change
management
issues associated
with
implementation,
along with
business benefits
and the effects on
skills policies.
The unit of analysis
in each case was
the firm.
outcomes. to Work For 2004?,
with respondents
chosen to represent
?a variety of industrial
contexts, sizes and
product strategies?.
Descriptive statistics
and correlation
analysis were
reported.
contingent on strategy and
industry sector.
That successful
implementation of HPWPs
is lead by senior
management who develop a
strong supporting culture.
Hewitt Associates
Employee
Engagement Survey
See:
www.hewittassociates
.com
Survey identifies
the drivers of
employee
engagement and
quantifies the
return on
investment for
improving each
driver.
Unit of analysis is
the firm.
Draws on several
theories of
motivation such as
organisational
commitment, job
satisfaction and
citizenship
behaviour.
Self reporting
instrument against 3
constructs:
Say—employees
consistently speak
positively about the
organisation to co-
workers, potential
employees, and
customers.
Stay—employees have
an intense desire to be
a member of the
organisation despite
opportunities to work
elsewhere.
Strive—employees
exert extra time, effort,
and initiative to
contribute to business
success.
Structural equation
modelling. Requires
samples > 200.
Hewitt results have been
compiled from over 1500
global companies.
? For every 10 per cent
improvement in
employee commitment
to the organisation
there is a
corresponding 6 per
cent increase in an
employee‘s
discretionary effort, and
a reduction in likelihood
to depart by 9 per cent.
? Every ?engaged?
employee is worth an
average of $5,000 each
year in additional profit.
? Companies with a
workforce engagement
score of 60 per cent or
higher have an average
five-year shareholder
return of 20.2 per cent.
133
4.2. Survey Design
Researchers are concerned with the validity of the findings of their study. Validity refers to the degree to which a
study accurately reflects or assesses the specific concept that the researcher is attempting to measure. Reliability
is concerned with the accuracy of the actual measuring instrument or procedure. This research instrument has
been designed following scientific research principles. Construct validity and content validity are particularly
important and have been considered throughout the design of this survey instrument, as follows:
Construct Validity
Construct validity is particularly important to designing research questions. Construct validity seeks agreement
between a theoretical concept and a specific measuring device or procedure. For example, a researcher inventing
a new IQ test might spend a great deal of time attempting to "define" intelligence in order to reach an acceptable
level of construct validity. Construct validity can be broken down into two sub-categories: Convergent validity and
discriminate validity. Convergent validity is the actual general agreement among ratings, gathered independently
of one another, where measures should be theoretically related. Discriminate validity is the lack of a relationship
among measures which theoretically should not be related. To understand whether a piece of research has
construct validity, three steps should be followed. First, the theoretical relationships must be specified. Second,
the empirical relationships between the measures of the concepts must be examined. Third, the empirical
evidence must be interpreted in terms of how it clarifies the construct validity of the particular measure being
tested (Carmines & Zeller, DATE?). In each of the Key Sheets accompanying the surveys, we explain the
theoretical relationships between different measures. In addition, we have sought to use constructs that have
been tested and validated in academic research elsewhere.
Content Validity
Content validity is based on the extent to which a measurement reflects the specific intended domain of content
(Carmines & Zeller, 1991). For example, assume that researchers aim to study mathematical learning and create
a survey to test for mathematical skill. If these researchers only tested for multiplication and then drew
conclusions from that survey, their study would not show content validity because it excludes other mathematical
functions. In this study we have attempted to increase content validity by undertaking a comprehensive literature
review on the drivers of high performance in the workplace covering a wide range of disciplinary areas.
4.3. Survey Methods
At the completion of the literature review, the research team developed a conceptual model to be tested via an
on-line survey. This section of the report draws on the experience of the research team and the research methods
literature to review the online survey methodology.
Online surveys
134
Utilising the internet to conduct quantitative research presents opportunities and challenges not offered by
conventional research methods due to distinctive technological, demographic and response characteristics. The
online survey will include numerous features to support the research design.
Survey Features
Flexible design
The survey will be offered through a dedicated website that will be used as a platform to provide more information
about the project, the researchers and the Department of Education, Employment and Workplace Relations. The
web pages will include links to affiliated institutions to give the project credibility and ensure the participants can
verify the authenticity of the research, thus encouraging higher response rates (Joinson & Reips, 2007).
The survey will include prompts if a respondent skips a question, which Zhang (2000) found increases a
respondent‘s motivation to compete the survey. This feature also provides the research team with the potential to
track how respondents interact with the survey. It is possible to analyse the requests made to the server hosting
the survey to measure the number of people opening a survey, viewing particular pages and submitting
responses or leaving the survey without submitting. This can allow problems affecting response rates in particular
sections of a survey to be identified and dealt with.
Other features of the online survey which enhance the research design include the tailoring of question streams
according to information offered by respondents. For example, where a respondent indicates they are a manager,
additional questions or choices will be included and some questions framed in alternate ways. Pop-up instructions
and drop down choice boxes also assist with response rate (Joinson & Reips, 2007).
Speed and volume of data collection
The online survey will enable the research team to collect large volumes of data quickly and at low cost. Cook,
Heath and Thompson (2000) and Couper, Traugott and Lamias (2001) estimate that most people complete an
online survey within 48-72 hours of receiving it, making turnaround fast compared to other methods (i.e. post).
Accuracy of data
Data will be analysed continuously and directly imported into statistical tools and an SPSS database. This
ensures that data processing is automated, reducing human error in data entry and coding. Data will be
automatically validated because if a data value is entered in an incorrect format, the web-based program will
return an error message requesting the respondent to enter the data correctly and resubmit the survey.
Anonymity
Given the survey seeks information on levels of commitment to an employer and other sensitive data; we concur
with Braunsberger, Wybenga and Gates (2007) that people are more likely to answer these questions via an
online survey compared to onsite paper based surveys or telephone interviews where interviewer effect and
privacy issues may affect reliability.
135
The research methods literature identifies a number of potential problems with online surveys. The following
strategies will be implemented to minimise these problems.
Length, response and dropout rates
Response rates to online surveys drop off significantly after 15 – 20 minutes (Frick, Bachtinger & Reips, 2001);
with Witmer, Colman and Katzman (1999) finding longer surveys elicit a response rate of 10 per cent or lower.
Further, online surveys must be appropriate and justified given increasing levels of ?survey fatigue? (Witte, 2009).
The following actions will be in place to ensure acceptable response rates. Crawford et al. (2001) propose that a
single email reminder can double the number of respondents while Schaefer and Dillman (1998) found that four
repeated contacts yield the highest response rate. Therefore we will send reminders according to the response
rate that is obtained. In some cases only one reminder may be necessary; however additional reminders will be
sent when required.
Cook et al. (2000) suggest that response rates can also be improved with carefully worded introductory letters or
emails that include details of estimated time to complete the survey and a statement indicating that the
respondent is part of a small group chosen to participate in the study (Porter & Whitcomb, 2003) and requesting
personal information at the start of the survey rather than the end (Frick et al., 1999). A communication from the
Chief Executive Officer of the organisation emphasising the benefits of participating in the research will be
included.
Incentives
There is substantial evidence that responses to online surveys are enhanced through the provision of financial
and non-financial incentives. The positive effect of incentives on response rates and data quality has been
reported in various industries. For example, Shaw, Beebe, Jensen and Adlis (2001) found that a US$5 incentive
to each individual that completed a survey resulted in a significantly higher response rate than offering a US$2
incentive; however the $US2 incentive produced better results than not offering any inducement.
Other researchers have used different versions of non-cash incentives to measure the effects on response rates.
Vandermeer (2000) suggested that using a mobile phone recharge card as an incentive has a positive effect on
response rates, as do shopping vouchers or gift certificates. There is also the option of offering larger prizes, such
as electronic devices to a random sample of respondents, for example, every 50
th
respondent (Vandermeer,
2000). In this study, we are yet to determine whether an incentive to complete the online survey should be
offered. An alternative way to increase response rates is to secure CEO level support for the high performing
workplace agenda and have the CEO communicate the importance of the survey and agenda throughout the firm.
The latter could possibly be more effective than traditional incentives (such as movie tickets and the like).
Technical Problems
136
Various technical problems can occur with online surveys. A computer or server may crash, for example,
especially if the survey is long. We have minimised reliance on complicated features of the survey and will
undertake a comprehensive pilot to ensure there are no technical difficulties. In addition, the survey to employees
will be 15 minutes long and a helpdesk and hotline will be established and operate between the hours of 8.30 am
and 5.00 pm for the entire survey period to answer questions and provide technical support.
Sample bias and measurement error
There are social and spatial divides in access and use of the internet which can induce sample biases to the
research population. Bias is introduced when the respondents who answer an online survey have very different
attitudes or demographic characteristics to those who do not respond. This is particularly the case for online
surveys because some social groups are underrepresented among internet users, including people of limited
financial resources, members of some ethnic groups, older people and those with lower educational levels
(Umbach, 2004).
This proposed population for this study will be drawn from the services sector of the Australian economy. This
sector relies heavily on internet facilities to operate. Therefore any sample bias will be minimal.
Ethical issues
Protecting respondent privacy and confidentiality is a significant ethical issue. The research team will be vigilant
about only collecting information with respondent permission. Data security and the protection of the anonymity
and confidentiality of the respondent data is a priority. The survey and full research project will be subjected to the
scrutiny of the Australian Bureau of Statistics Clearing House and the University of New South Wales Ethical
Research Protocols before administration commences.
In summary, to improve the research design and response rate, the following actions will be implemented:
? Send introductory letter outlining project and estimated time needed to complete the survey;
? Include an institutionally sanctioned website to validate researchers‘ identity;
? Provide clear instructions on how to complete the survey;
? Request personal biography information at the start of the survey rather than the end;
? Use simple survey format and avoid unnecessary graphics;
? Avoid grid questions, open-ended questions and requests for email addresses;
? Design the survey so it takes approximately 15 minutes to complete;
? Use appropriate incentives if possible;
? Send one or two follow up reminders;
? Include ?social presence? or missing data messages to reduce item non-response;
? Emphasise confidentiality; and
? Establish a help desk and hotline.
137
5. Industry Sector Surveyed: Property and Business Services
5.1. Introduction
The sample of firms is concentrated on Property and Business Services (P&BS), which is one of 17 subsectors
that comprise the Australian economy.
28
This industry division is primarily concerned with the provision of
property services including property sales, operation and development and business services such as legal
services, advertising and cleaning. The industry division is important to Austral ia because of its scale (slightly
larger than the manufacturing sector on many economic characteristics) and its potential for both continued
export growth and the generation of well paid jobs. Key markets for this division include other industries,
government bodies and consumers.
5.2. Industry Composition: A Definition
The sample covers a wide range of service activities, primarily because Property and Business Services is a
diverse sector. Table 9 below gives a description of potential firm activities based on a detailed breakdown of
ANZSIC codes. It is apparent that the firms in this industry vary widely in a number of dimensions such as the
skills requirements (cleaning compared to accounting services) and their ease of exporting (compare residential
property operators, legal services and advertising).
Table 9: Description of Property and Business Services Industry
Industry Subdivisions
29
(2 & 3 digit ANSIC codes)
Examples of Included Business Activities (based
on4 digit ANZSIC codes)
77 Property Services
771 Property Operators and Developers Residential property operators, & commercial
property operators and developers
772 Real Estate Agents Real estate agents
773 Non-Financial Asset Investors Operators engaged in holding intellectual property or
other non-financial assets
774 Machinery and Equipment Hiring and
Leasing
Motor vehicle hiring, transport equipment leasing,
plant hiring.
78 Business Services
781 Scientific Research Scientific research
782 Technical Services Architectural, surveying, consulting engineering and
other technical services
783 Computer Services Data processing, information storage and retrieval,
computer maintenance and computer consultancy
784 Legal and Accounting Services Legal and accounting services
785 Marketing and Business
Management Services
Advertising, commercial art, market research,
business administration and business management
28
Based on the Australian and New Zealand Standard Industrial Classification (ANZSIC). The correspondences between ANZSIC 1993 and
ANZSIC 2006 are listed in ABS 1292.0, Australian and New Zealand Standard Industrial Classification (ANZSIC), 2006, (Revision 1.0),
chapter 10. ANZSIC 1993 L Property and Business Services corresponds to subsectors across ANZIC 2006 L Rental, Hiring and Real Estate
Services; M Professional, Scientific and Technical Services and N Administrative and Support Services. For comparability with historical data
this report will focus on industry sector ANZIC 1993 L.
29
Aged Care Residential Services although classified in the Health Care and Social Assistance industry, contains significant elements of
residential property services as well. This subcategory is not included in the industry characteristics and trends discussion of section 5.3 and
5.4. Aged Care Residential Services (ANZSIC 2006: 8601)
138
services
786 Other Business Services Employment placement, contract staff services,
secretarial, security, pest control, cleaning, packing
and other business services.
5.3. Economic Characteristics of the Property and Business Services Sector
30
? Contribution to GDP
31
: P&BS was the largest contributor to GDP in 2007-08 amongst the service
industries at $131.9 billion (14.4 per cent of total GDP). Services industries in total contributed $702.4
billion to GDP (76.6 per cent) compared to $106.8 billion from manufacturing (11.6 per cent).
? Employment
32
: PB&S is the second largest employer amongst service industries, employing 1.256
million people in 2007-2008 (12.1 per cent of total employment). This exceeded the share of total
employment for any other sector: manufacturing 10.4 per cent, mining 1.5 per cent and agriculture 8.3 per
cent.
? Earnings
33
: Median weekly earnings (full-time before tax) as at May 2006 in P&BS were $980, 8.9 per
cent higher than the ?all industries? average. There was great heterogeneity in median weekly earnings.
For example, the highest group, Computer Services, received $1231 while the lowest groups, Real Estate
and Other Business services received $800.
? Exports
34
: Transport and storage was the largest exporter in the services sector at $9.394 billion, closely
followed by P&BS at $9.316 billion. These are only moderate levels compared to manufacturing which
exported $88.5 billion in the same year.
? Firm demographics: Approximately a quarter of all Australian businesses are in PB&S (507,786)
dwarfing all other sectors.
35
? Financial Performance: Average sales and service income per employee (2005-06) by business size
are: $215371 (small), $184554 (medium) and $124741 (large).
36
? Innovation
37
: the proportion of innovating
38
businesses in the P&BS industry (2006 – 07) is 33.7 per cent
compared with 32.7 per cent for the economy as a whole and 44.2 per cent for manufacturing. This
30
Due to data availability, and to facilitate comparison, statistics are focused around the 2007-08 financial year, although in some cases only
earlier data is available.
31
Key Facts, Australian Industry 2007-08, DIISR.
32
ibid.
33
Employment Outlook for Property and Business Services, October 2007, www.skillsinfo.gov.au .
34
Key Facts, Australian Industry 2007-08, DIISR.
35
Source: ABS Cat. 81550 (2005-06). The distribution of firm sizes (2005-06) was small (<20) 96.6 per cent, medium (20-199) 3.03 per cent
and large (200+) 0.32 per cent.
36
ibid. Calculated as sales and service income divided by total employment in size subsample.
139
places P&BS in the middle of the field in terms of service industries in Australia.
39
5.4. Significant Trends
Growth in total value added (GDP) in P&BS in 2007-2008 was 5.7 per cent, significantly above both the service
industry average of 4.3 per cent and the overall rate for Australian Industries of 4.1 per cent.
40
The year-on-year
increase in gross value added has been positive and consistent, with the 20-year trend (1986-2006) slightly
stronger than the 5-year trend to 2006.
41
In 2007-2008 employment growth in P&BS was 4.3 per cent, significantly higher than the 1.5 per cent
experienced by the economy as a whole.
42
This strong employment growth is typical of the long run employment
changes in the industry. The 10-year annualised growth in employment to May 2007 was 3.9 per cent, which was
the strongest industry growth in Australia.
43
However growth in value added has not outpaced the increase in employment and, in general, labour productivity
growth (gross value added per employee) performance has been poor. The average annual percentage growth
rates for P&BS in Australia were -1.6 (1975-85), -2.0 (1985-95) and 0.9 (1995-2005). This pattern of slow growth
in labour productivity in P&BS compared to the economy as a whole has been observed in a number of other
developed nations, including the US, UK, France, Japan and Germany.
44
Starting in 2001, developments in ICT appear to have propelled a rapid expansion in world trade of services.
Average annualised growth rates in 2001-05 were 12.5 per cent. Of this expansion Other Commercial Services
has been the largest and fastest growing category, ahead of travel service and transportation services. Other
Commercial Services is a diverse category but in 2004, 50 per cent of the world trade in this category was from
business services.
45
Australia‘s experience of this expansion in services trade has been somewhat different, as the Department of
Industry, Tourism and Resources observed in Background Paper 3 (2007, p10), ?The composition of Australia‘s
service exports contrasts to other high-income economies with its high proportion of tourism exports, and
relatively low proportion of Knowledge-Intensive Business Services (KIBS)
46
exports.?
37
Source: Services Sector: Overview of Structural Change, Industry Brief 2007-08, Department of Innovation, Industry, Science and
Research.
38
Innovation is any new or significant improved product or service, new or significant improved operational process, new or significant
improved management process, or, new or significant improved marketing.
39
Besides issues of availability the ABS innovation data is to be preferred because ?…organisational innovation is very important in the
service sector but weakly reflected in R&D expenditure, as well as in patents data.? National Innovations System Review (2008, Chapter 1
page 7), DIISR
40
Source: Services Sector: Overview of Structural Change, Industry Brief 2007-08, DIISR, p98.
41
Background Paper 3: Austalian Services Sector Trends, 2007, Department of Industry, Tourism and Resources, p30.
42
Source: Services Sector: Overview of Structural Change, Industry Brief 2007-08, Department of Innovation, Industry, Science and
Research.
43
Employment Outlook for Property and Business Services, October 2007, www.skillsinfo.gov.au
44
Source for labour productivity data: EU KLEMS database as reported in Services Sector: Overview of Structural Change, Industry Brief
2007-08, DIISR. p19-20.
45
Background Paper 4 : Drivers of Change in Australian Industry, 2007, Department of Industry, Tourism and Resources, p8-10.
46
KIBS is the Finance & Insurance industry plus P&BS.
140
The short and long-term implications of these recent growth numbers are unclear as we move through a period of
pronounced economic uncertainty surrounding the Global Financial Crisis. It is clear however that Property and
Business Services is an important industry worthy of in-depth research.
5.4. Concluding Summary
Property and Business Services is a diverse industry of increasing importance to Australia. It is a large and
growing contributor to both employment and GDP, passing manufacturing in the last decade. Exports from the
industry have also been growing, and knowledge intensive business services, KIBS (of which P&BS are part), are
a major component of the world trade in services, although Australia has a smaller share of KIBS in its service
exports than other high income countries. Growth in labour productivity in P&BS has been slow in Australia and
that reflects a common trend across high income nations. What can be done to foster increased labour
productivity and continued export growth in the industry are key open policy questions.
141
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About the Society for Knowledge Economics
The Society for Knowledge Economics (SKE) is a not-for-profit organisation founded in June 2005. Members
include Microsoft, Westpac Banking Corporation, CPA Australia, PricewaterhouseCoopers, HP Enterprise
Services, and the University of New South Wales.
The SKE‘s vision is to make Australian workplaces the most innovative, productive and fulfilling places in the
world.
A leading knowledge economy is one that aims to better understand, develop and leverage the most potent force
in creating economic and social value today—its people and collective knowledge.
To this end, the SKE conducts industry-based research projects and prepares policy submissions, research
papers, thought leadership pieces and editorials to influence policy directions and management and leadership
practices in the Australian economy. Visit www.ske.org.au for more information.
SKE Research and Collaborative Projects
The SKE Industry Partnering and Research Program brings together representatives from private, public,
research and community organisations to investigate, research, test and develop practical programs and tools for
the benefit of Australian workplaces as a whole.
Some of our research partners include:
? Business Council of Australia
? Certified Practicing Accountant (CPA) Australia
? Department of Education, Employment and Workplace Relations, Canberra
? Department of Finance and Deregulation, Canberra
? Department of Innovation, Industry and Regional Development, the Victorian Government
? Innovation and Business Skills Australia
? Microsoft Australia
? New South Wales Department of Lands
? Organisation for Economic Co-operation and Development (OECD) World Intellectual Capital
Initiative
? University of New South Wales
? United States Enhanced Business Reporting Consortium (the U.S. Securities and Exchange
Commission)
? Westpac Banking Corporation
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Research Reports:
• Society for Knowledge Economics (2009), Leading Australia to More Innovative, Productive and Fulfilling
Workplaces—The Role of Government, prepared on behalf of the Department of Education, Employment
and Workplace Relations, November, 2009.
• Society for Knowledge Economics (2009), Workplaces of the Future, prepared on behalf of the
Department of Education, Employment and Workplace Relations, for the Workplaces of the Future
Forum, Melbourne, July, 2009.
• Society for Knowledge Economics (2009), Enterprise Innovation, prepared on behalf of Innovation and
Business Skills Australia, for the Innovation and Business Skills Australia Innovation Summit, Parliament
House, Canberra, June, 2009.
• Society for Knowledge Economics (2009), Development of an Innovation Capability Framework and a
Library of Resources and Intervention Strategies, prepared on behalf of Innovation and Business Skills
Australia, January, 2009.
• Society for Knowledge Economics (2008), Enabling Innovation: Leadership, Culture and Management at
the Workplace Level, prepared on behalf of the Victorian Department of Innovation, Industry and Regional
Development, June, 2008.
• Society for Knowledge Economics (2008), Australia’s National Innovation System, submission to Dr Terry
Cutler‘s National Innovation Review Panel, sponsored by the Business Council of Australia, April, 2008.
• Society for Knowledge Economics (2008), Submission to the Enhanced Business Reporting Consortium
for the U.S. Securities and Exchange Commission’s Advisory Committee on Improving Financial
Reporting, January, 2008.
• Society for Knowledge Economics (2007), Leadership and Culture—the Missing Pillar of the National
Innovation Agenda, a response to the Victorian Government‘s proposed National Innovation Agenda,
November, 2007.
• Society for Knowledge Economics (2005), Intangible Drivers of Organisational Productivity and
Prosperity—International Trends and Developments in Extended Performance Management,
Measurement and Reporting, prepared on behalf of the Department of Finance, February, 2007.
• Business Council of Australia, in collaboration with the Society for Knowledge Economics (2006), New
Pathways to Prosperity—a National Innovation Framework for Australia, November, 2006.
• Society for Knowledge Economics (2005), Australian Guiding Principles on Extended Performance
Management—A Guide to Better Managing, Measuring and Reporting Knowledge Intensive
Organisational Resources, prepared in collaboration with CPA Australia, November, 2005.
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