Management Research Review

Emerald Article: Investigating reverse causality between human resource

management policies and organizational performance in small firms
Anastasia A. Katou

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To cite this document: Anastasia A. Katou, (2012),"Investigating reverse causality between human resource management policies and
organizational performance in small firms", Management Research Review, Vol. 35 Iss: 2 pp. 134 - 156
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performance in small firms", Management Research Review, Vol. 35 Iss: 2 pp. 134 - 156
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Anastasia A. Katou, (2012),"Investigating reverse causality between human resource management policies and organizational
performance in small firms", Management Research Review, Vol. 35 Iss: 2 pp. 134 - 156
http://dx.doi.org/10.1108/01409171211195161
Anastasia A. Katou, (2012),"Investigating reverse causality between human resource management policies and organizational
performance in small firms", Management Research Review, Vol. 35 Iss: 2 pp. 134 - 156
http://dx.doi.org/10.1108/01409171211195161

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Investigating reverse causality

between human resource
management policies and
organizational performance
in small firms
Anastasia A. Katou
University of Macedonia, Thessaloniki, Greece
Abstract
Purpose The purpose of this paper is to test reverse causality between human resource management
(HRM) policies and organizational performance, through the intervening steps of employee attitudes
(satisfaction, commitment, motivation) and employee behaviors (absences, turnover, disputes), which
are still relatively untested in small firms and in a non-US/UK context such as Greece.
Design/methodology/approach Structural equation modeling was used to survey data from
197 small Greek private companies (manufacturing, services, trade) to examine causal inferences.
Findings The study finds that HRM policies, being contingent on business strategies
(cost, innovation, quality), have a positive effect on organizational performance through employee
attitudes and employee behaviors. Furthermore, the study supports the view that although HRM
policies do not directly lead to high organizational performance, it is high-performing firms that can
directly afford HRM policies.
Research limitations/implications Although time-lags are not present in the study in order to
test time-dependent reverse causality, the concept of instant changes is used to empirically
demonstrate, through a simultaneous equation system, the causal order of the variables involved in the
relationship under consideration.
Practical implications Based on the business strategies of improvement of goods, quality
enhancement and improvement of service, rather than on trying to cut costs and prices, the findings
have implications for practitioners seeking to design HRM policies that will improve organizational
performance.
Originality/value The paper examines reverse causality within a simultaneous equations system
expressing the relationship between HRM policies and organizational performance.
Keywords Greece, Employees attitudes, Employees behaviour, Reverse causality, Business strategies,
HRM policies, Organizational performance
Paper type Research paper

Management Research Review

Vol. 35 No. 2, 2012
pp. 134-156
q Emerald Group Publishing Limited
2040-8269
DOI 10.1108/01409171211195161

1. Introduction
Although positive relationships have been reported between human resource
management (HRM) policies and organizational performance over the past decade or
so, the causal ordering of the variables included in these relationships was not
persuasive (Wright et al., 2005). Thus, analyzing the literature on the HRM-performance
relationship serious gaps in our knowledge still remain (Purcell et al., 2003). This is
because it has been supported that it is more important to investigate how something
is done compared to what has been done (Paul and Anantharaman, 2003).

In trying to analyze how HRM policies cause higher organizational performance,

theoretical frameworks have been introduced where mediating variables were
considered to intervene the HRM policies-organizational performance relationship
(Becker and Gerhart, 1996; Wright and Gardner, 2003). Thus, the usual research design
where individual HRM policies were directly affecting organizational performance was
not adequate, because this design was not considering the intervening steps, or
mediating variables, between HRM policies and organizational performance (Becker
and Gerhart, 1996; Wright and Gardner, 2003).
Numerous models have been proposed suggesting various mediating variables. For
example, Becker and Huselid (1998) and Wright and Snell (1998) suggested that HRM
policies influence organizational performance through employee behaviors. Becker et al.
(1997) argued that mediating variables in this relationship could be employee attitudes
and employee behaviors that influence discretionary behavior which in turn affects
organizational performance. Furthermore, Youndt et al. (1996) and Purcell and
Hutchinson (2007) supported the view that the direct influence or the indirect influence
through mediating variables, of HRM policies on organizational performance are not
necessarily mutually exclusive, but on the contrary they can be complementary.
The various research frameworks proposed with respect to the HRM
policies-organizational performance relationship were implicitly assuming that
HRM policies lead directly or indirectly though mediating variables to organizational
performance. However, this assumption of one-way forward causality from HRM
policies to organizational performance was criticized as being unsatisfactory, because it
was argued that rather than HRM policies leading to high organizational performance,
it is the highly performing firms that can afford HRM policies (Edwards and Wright,
2001; Gerhart, 1999; Huselid, 1995; Ichniowski et al., 1997). Thus, the direction of
causality in the HRM-performance relationship was advised to be further investigated
(Boselie et al., 2005).
Context was another dimension of criticism in the HRM policies-organizational
performance relationship. This is a concern because it seems unlikely that one set of
HR practices will work equally well no matter what context (Gerhart, 2005, p. 178).
The literature indicates that most investigations were concentrating on large
organizations and on US/UK-oriented models (Boselie et al., 2003). To fill this gap and
to further examine the process through which HRM policies impact organizational
performance, this paper investigates how HRM influences organizational performance
in small firms and in non-US/UK context, such as Greece. Greece is a peripheral
country in the European Union that is influencing and being influenced by the Balkan
and the Black Sea countries. The Greek, and the Balkan and Black Sea countries,
context is rather different from the west European countries context. Therefore,
it would be interesting to push forward the debate on the HRMs role in improving
organizational performance to countries such as Greece (Katou and Budhwar, 2010).
Considering the presentation thus far, it is clear that the purpose of this paper is as
follows:
(1) To investigate whether in small firms HRM policies influence organizational
performance through employee attitudes (such as satisfaction, commitment,
and motivation) and employee behaviors (such as absences, turnover, and
disputes). This will contribute to the literature by explaining the mediating

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mechanisms that take place in the relationship between HRM policies and
organizational performance (Conway and Monks, 2008).
(2) To investigate whether a bilateral causality exists between HRM policies and
organizational performance. This will contribute to the literature because this
question is still relatively untested (Boselie et al., 2005; Van Veldhoven, 2005;
Wright and Gardner, 2003).
(3) To investigate the relationship between HRM policies and organizational
performance in the Greek context. This will contribute to the literature because
this literature highlights that most of studies examining this relationship have
been conducted in the USA and to a lesser extent in the UK. Therefore, the
question that arises is whether the US/UK-oriented models, however appropriate
they might be for USA/UK, hold in other contexts (Boselie et al., 2003).
2. Research model and hypotheses
Figure 1 shows an operational model linking HRM policies to organizational
performance. The model is adapted from the frameworks of Paauwe and Richardson
(1997), Boselie et al. (2005) and Purcell and Hutchinson (2007) that have been developed
in order to answer questions with respect to the HRM-performance relationship in the
US/UK context, and it is also adapted from the framework of Katou and Budhwar
(2010), that has been developed in order to answer questions in other contexts such as
Greece. The proposed model is blending insights from the theories of contingency and
the resourced-based view into an overall theory of HRM (Boselie et al., 2005). In
particular, following a structural-type presentation the specific parts of the proposed
model are explained.
2.1 Business strategies and organizational performance
Although there are a number of various strategies an organization may choose to follow
in order to gain and retain competitive advantage, that is supposed to be crucial to an
organizations growth and prosperity, the following three types of generic strategies,
i.e. basic strategies that any organization may use, are usually cited in the literature:
Generic corporate strategies (growth, stability, defensive, and combination strategies)
that are adopted and followed by the organization as a whole (Anthony et al., 1996);
Generic business strategies (cost leadership, innovation, and quality enhancement)
H1

H2
Unmediated HRM effect

Business Strategies
Cost
Innovation
Quality

Figure 1.
A HRM
policies-organizational
performance linkage
framework

H3

HRM Policies
Resourcing
Development
Rewards
Relations

H4

Employee Attitudes
Satisfaction
Commitment
Motivation

H5

Employee Behaviours
Absences
Turnover
Disputes

H7
Reversed causality

H8

Controls: Sector (Manufacturing, Services, Trade), Size (small, medium, large)

H6

Organisational
Performance

that adopt the concept of competitive advantage (Porter, 1985); Competitive product
strategies (defenders, prospectors, analyzers, and reactors) that refer to the strategic
choices an organization makes in order to link the organization with its environment
product market and to establish the basic direction of the organization (Miles and
Snow, 1984).
We have chosen Porters theory of generic business strategies for our study because
it has been shown to be a relatively powerful predictor of organizational effectiveness
(Youndt et al., 1996), scholars have highlighted its implications for an organizations
HRM policies (Schuler, 1989; Schuler and Jackson, 1987), and although the theory has
been commonly used in the strategic HRM literature, its examination in the Greek
context was rather limited (Panayotopoulou et al., 2003).
We usually expect a positive relationship between the cost, quality, and innovation
strategies, and business performance (Huselid, 1995). Firms pursuing a cost strategy
aim at minimizing overheads and maximizing economies of scale and thus expect
positive performance results (Schuler and Jackson, 1987). Firms pursuing a quality
strategy aim at delivering high-quality goods and services to customers emphasizing
resource effectiveness and productivity, characteristics that fit the rationale of a goal
model (Cameron and Quinn, 1999). Firms pursuing an innovation strategy aim at
making the organization the unique producer, suggesting that the organization gains
and retains competitive advantage through adaptation to its environment (Segev,
1989). Accordingly, the hypothesis developed is as following:
H1. A positive relationship exists between business strategies (cost, innovation,
and quality) and organizational performance.
2.2 HRM policies and organizational performance
Since the concept of HRM emerged in early 1980s in the USA/UK, many models have
been developed which imply a direct relationship between individual human
resource practices, as well as internally consistent systems of HR practices and
organizational performance (Schuler and Jackson, 1999). The major objective of these
models has been to determine the extent to which individual HR practices and/or HRM
systems directly enhance business performance (Katou and Budhwar, 2006).
With respect to this objective, some authors initially focused on the relationship
between individual HR practices and organizational effectiveness, such as on
staffing (Terpstra and Rozell, 1993), promotion systems (Ferris et al., 1998), goal setting
(Terpstra and Rozell, 1993), training (Russell et al., 1985; Bartel, 1994), compensation
(Gerhart and Milcovich, 1990; Banker et al., 1996b), early retirement programs
(Davidson, 1996), and work teams (Banker et al., 1996a). Later, the dominant trend in
this research has been to take a systems view to link either HRM systems (Arthur,
1994; Kalleberg and Moody, 1994; Huselid, 1995; MacDuffie, 1995; Huselid and Becker,
1996; Youndt et al., 1996; Huselid et al., 1997) or industrial relations systems
(Cutcher-Gershenfeld, 1991; Arthur, 1992) to organizational effectiveness measures.
Some studies have analyzed the effects of various HR practices on firm performance
(Delery and Doty, 1996; Welbourne and Andrews, 1996; Delaney and Huselid, 1996) or
shareholder value (Abowd et al., 1990). Generally, the foregoing systems view and the
aggregation of individual HR practices into a composite index, this clearly seems to
reflect the dominant thinking today (Ferris et al., 1998). Therefore, we hypothesize as
follows:

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H2. A positive relationship exists between HRM policies (employee resourcing,

development, rewards, and relations) and organizational performance.
2.3 Business strategies and HRM policies
There are two fundamental approaches in the HRM-performance debate, i.e. the
best-practices stream and the best-fit stream. The best-practices stream, or the
so-called universalistic models advocate independence, supporting that business
strategies and HRM policies are mutually independent in determining business
performance. The best-fit stream, or the so-called contingency models advocate
sequence, supporting that business strategies are followed by HRM policies in
determining business performance. In this study we are focusing on the second
approach as being preferable (Boselie et al., 2003). This approach has also been followed
in the models of Becker et al. (1997) and Guest (1997) where vertical fit is a necessary
condition for success, represented by the link between strategy and design of HRM
systems or HRM practices (Paauwe, 2004, p. 58). However, although it seems to be a
general belief that the HRM-performance relationship depends on contextual factors
such as business strategy, there is little empirical evidence to support this belief (Wright
and Gardner, 2003; Godard, 2004; Gerhart, 2005). If studies of the HR-performance
relationship continue to find no evidence that context matters, either the contingency
theory central to strategic HR is flawed or the methodology (Gerhart, 2005, p. 178).
Additionally, suggesting that business strategies are followed by HRM policies in
determining business performance (Gomez-Mejia and Balkin, 1992), scholars offered a
list of options positively linking Porters (1985) generic business strategies of cost
reduction, quality enhancement, and innovation with HRM policies in improving
organizational performance (Schuler and Jackson, 1987; Youndt et al., 1996). Thus, we
hypothesize that:
H3. A positive relationship exists between business strategies (cost, innovation,
and quality) and HRM policies (employee resourcing, development, rewards,
and relations).
2.4 HRM policies and employee attitudes
In investigating the link between HRM policies and organizational performance, many
authors argued that employee attitudes such as satisfaction, commitment, and
motivation are mediating the relationship between HRM policies and organizational
performance (Purcell and Hutchinson, 2007). For example, Delery and Doty (1996)
argued that HRM policies positively influence organizational performance by creating
a workforce that is committed and motivated. Fey et al. (2000) provided some support
for the use of employee motivation as mediating variable between HRM policies and
organizational performance. Guest (2001) used employee satisfaction and commitment,
or employee quality, commitment, and flexibility, as mediating variables. Boselie et al.
(2001) indicated employee satisfaction and motivation, as HRM mediating outcomes
between HRM policies and organizational performance. Park et al. (2003) used
employee motivation as mediating variable between HRM systems and organizational
performance. Paul and Anantharaman (2003) indicated that the intervening variable of
employee commitment affects organizational performance. Accordingly, the
hypothesis developed is as following:

H4. A positive relationship exists between HRM policies and employee attitudes
(employee motivation, commitment, and satisfaction).
2.5 Employee attitudes and behaviors
The resource-based view (RBV) perspective (Barney, 1991) argues that HRM policies
such as employee resourcing, development, rewards, and relations may play an
important role in building the organizations human capital pool by developing its rare,
inimitable and non-substitutable internal resources (Katou and Budhwar, 2010). The
core philosophy of the RBV perspective suggests that HRM policies have a direct
impact on employee attitudes, such as employee satisfaction, commitment, and
motivation, which subsequently influence employee behavior, such as employee
absences, turnover, and disputes that consequently affect organizational performance
(Boxall and Steeneveld, 1999). Furthermore, the RBV perspective advocates that
differences in business performance can be ascribed to the ability of an organization to
exploit the inimitable characteristics of its pool of resources and not just to the HRM
policies themselves since they are easily copied (Wright et al., 2003). However, Guest
(1997) assumes that only when employee attitudes and behavior are achieved we may
expect higher organizational performance. Additionally, it is argued that positive
employee attitudes will produce low absences, turnover, and disputes (Guest and
Conway, 2004; Sturges et al., 2005; Pare and Tremblay, 2007; Perryer et al., 2010). This
assumption may be important in terms of further exploring the existence, nature, and
strength of the mediating variables in the HRM-performance relationship (Wright and
Gardner, 2003). Accordingly, the hypothesis developed is as following:
H5. A negative relationship exists between employee attitudes and employee
behaviors (employee absences, turnover, and disputes).
2.6 Employee behaviors and organizational performance
Although employee attitudes lie at the heart of strategic HRM (Boxall and Purcell,
2002), it is argued that they are not sufficient for improving organizational
performance unless they affect employee behavior, such as absences, turnover, and
disputes. According to the job performance theory (Campbell, 1997), it is employees
attitudes that have an impact on employees behavior (Luna-Arocas and Camps, 2008)
that subsequently have an impact on organizational performance (Wright et al., 2003).
Thus, employee behavior mediates the relationship between employee attitudes and
organizational performance (Vandenberg et al., 1999). Specifically, in the case of high
employee absences, turnover, and disputes the impact on organizational performance
will be negative. As a result, the hypothesis developed is as following:
H6. A negative relationship exists between employee behaviors and
organizational performance.
From the presentation thus far, it is derived that the support of H4-H6 indicate that
employee attitudes and behaviors serially mediate the relationship between HRM
policies and organizational performance (Purcell and Hutchinson, 2007).
2.7 Reverse causality and HRM policies
In investigating the HRM policies-organizational performance relationship we
implicitly assume that HRM policies lead to organizational performance. In this case

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HRM policies influence organizational performance either directly (H2) or indirectly

through employee attitudes and behaviors (H5 and H6). For example, HRM policies
with respect to training and job design may improve organizational efficiency directly,
by improving employees knowledge, skills, and abilities. On the other hand, HRM
policies with respect to compensation and promotion may improve organizational
development indirectly, by improving first the employees attitudes of satisfaction and
motivation and by diminishing next the employees behaviors of turnover and
disputes. However, such an assumption of a one-way line of causation may be
unsatisfactory (Edwards and Wright, 2001). The usual major criticism in the HRM
policies-organizational performance relationship is that, rather than HRM policies
leading to high organizational performance, it is the highly performing firms that can
afford HRM policies (Huselid, 1995; Ichniowski et al., 1997; Gerhart, 1999). In other
words, increased organizational performance may mean that the organization has
sufficient resources to use for properly applying HRM policies. For example, if the
organization is developing in its capacity to meet future opportunities and challenges,
it may use the HRM policies of training and development and increased compensation.
This criticism may be important in terms of further investigating the direction of
causality in the HRM-performance relationship (Boselie et al., 2005). This is because
most studies investigating the HRM policies-organizational performance relationship
overlook the reverse causality explanation, whereby any significant positive
relationship between HRM and organizational performance may be seen in
high-performing and resource-rich organizations, which are more willing to further
invest in HRM than the low-performing organizations (Boselie et al., 2005; Hiltrop,
1999). Thus, we may hypothesize that high organizational performance may influence
the extensive use of HRM policies, as follows:
H7. A positive relationship exists between organizational performance and HRM
policies.
2.8 Controls
Without incorporating relevant controls in the HRM policies-organizational
performance relationship into the research designs the results of the analyses may
be erroneous (Boselie et al., 2005). The typical controls used are the sector of
production where the companies are activated (i.e. manufacturing, services, and trade),
and the size of the company in terms of the number of people employed. In our study
size refers to very small and small firms. Hence, supporting again the contingency
approach in the proposed model, as we did above, it is hypothesized that:
H8. Controls (sector, and size) influence the HRM policies-organizational
performance relationship.
3. Methods
3.1 Sample
Data for this research were collected in May and June 2010 with the help of a
questionnaire survey distributed to all 280 private companies registered in the
Chamber of Commerce of Edessa. Edessa is the capital of the prefecture of Pella, which
is named after the ancient city of Pella, the capital of ancient Macedonia. Pella is one of
the 51 prefectures of Greece, it is located in the north of Greece, and it has about 200,000

inhabitants. From the 280 questionnaires handed to the directors of the companies,
197 usable questionnaires were returned, a response rate of 70.4 percent.
The breakdown of company size with regard to number of employees in the labor
force is as follows: up to 50 employees, 86.3 percent; and more than 50 employees,
13.7 percent. Considering that the vast majority of companies have up to 50 employees,
and those companies that have more than 50 employees are still rather small, it is
alleged that the study refers to small companies. Of the sample of these 197 private
firms, the sector category distribution is as follows: manufacturing, 17.8 percent;
services, 34.5 percent; and trade, 47.7 percent.
3.2 Measures
3.2.1 Business strategies. For the classification of Porters (1985) three business
strategies we followed Sanz-Valee et al. (1999). Specifically, the business strategies and
the corresponding items were as follows: cost strategy (cost reduction, and price
reduction); innovation strategy (innovation, improvement of existing products, and wide
range of products); and quality strategy (quality enhancement, distribution channels,
and customer service). The eight business strategy items were measured on a scale ranging
from 1 not very important to 5 totally essential. Particularly, the respondents were
asked How would you rate the importance of the quality enhancement strategy in your
organization?
3.2.2 HRM policies. The construct of HRM policies comprised 12 items
(e.g. recruitment, selection, flexible work arrangements; work design, performance
appraisal, training and development; compensation, promotion, incentives; and
participation, involvement, communication) referring to the usual four key areas of
resourcing, development, reward, and relations developed by Armstrong (1996). The
items were measured on a scale ranging from 1 low use to 5 high use.
Specifically, the respondents were asked How would you rate the use of the training
and development policy in your organization?
3.2.3 Employee attitudes. Employee attitudes were measured with three aggregate
items (e.g. motivation, commitment, and satisfaction) following Katou and Budhwar
(2006, 2010). We acknowledge that the employee motivation, commitment, and
satisfaction items could instead be introduced as three distinctive constructs by
themselves, and thus, they should not be combined into one general measure. However,
we decided to accept this aggregation because our model was already too large and
complex and by introducing into the model three more separate constructs would make it
more complex without necessarily improving the validity of the model. Responses were
made on a five-point scale ranging from 1 very bad to 5 very good. Specifically,
the respondents were asked How would you rate satisfaction in your organization?
3.2.4 Employee behaviors. Employee behavior was measured with three items
(e.g. number of absences, number of voluntary leave, and number of disputes with
organization) following Katou and Budhwar (2006, 2010). We decided to use these
behavioral outcomes, or the so-called individual effectiveness outcomes (Zhao et al.,
2007), and not others such as employee effort and organizational citizenship, because
actual absences, labor turnover, and disputes are closely related to organizational
performance outcomes (Guest, 1997). Responses were made on a five-point scale ranging
from 1 very small to 5 very big. Specifically, the respondents were asked How
would you rate the number of absences in your organization?

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3.2.5 Organizational performance. We used multiple organizational performance

variables (Chenhall and Langfield-Smith, 2007) which were measured under the
philosophy of a perceived rating of the organizations performance on a five-point
scale ranging from 1 very bad to 5 very good. The specific items constituting
the organizational performance construct were effectiveness, if the organization
meets its objectives; efficiency, if the organization uses the fewest possible resources
to meet its objectives; development, if the organization is developing in its capacity to
meet future opportunities and challenges; satisfaction, of all participants
(stakeholders, employees, customers), developed by Delaney and Huselid (1996).
Specifically, the respondents were asked How would you rate effectiveness
[if the organization meets its objectives] in your organization?
3.2.6 Controls. Two control variables were used in order to rule out alternative
explanations of the findings (Turnley and Feldman, 2000). Specifically, we used the
oganisational controls of sector (1 manufacturing, 2 services, and 3 trade)
and size (1 up to 50 employees, and 2 more than 50 employees).
3.3 Consistency of the survey instrument
3.3.1 Content validity. We cited above all items and the scales used that constitute the
constructs used in the study. These items are well accepted in the literature for
representing the corresponding phenomena. Therefore, content validity was
established by operationalizing these well accepted and validated items developed in
the literature (Straub, 1989). Furthermore, ten private companies registered in the
Chamber of Commerce of Edessa were randomly chosen to conduct a pilot survey for
avoiding ambiguity of the questions involved. Most of the questionnaires were filled
with the help of samplers, who were students of a business school in the north of
Greece.
3.3.2 Construct internal consistency. Construct internal consistency was
investigated by evaluating the computed Cronbachs (1951) alphas. The figures in
Table I indicate that the survey instrument is reliable for testing the model shown in
Figure 1, as all Cronbachs alphas are much higher than 0.70 (Nunnally, 1978).
3.3.3 Construct validity. Construct validity was examined by evaluating the
percentage of the total variance explained per dimension obtained by applying
confirmatory factor analysis (CFA) with varimax rotation and the eigenvalue greater
than one criterion using LISREL (Joreskog and Sorbom, 2004). The percentage of total
variance-explained values reported in Table I, where all items loaded well on their
respective factors (omitted for brevity), are higher than 50.0 percent indicating
acceptable survey instrument construct validity (Hair et al., 2008). Furthermore,
construct validity was also examined by evaluating the average variance extracted
(AVE) per dimension obtained by applying CFA (Smith et al., 1996). The AVE values
reported in Table I are much higher than 0.50 indicating acceptable survey instrument
construct validity (Hair et al., 2008).
3.3.4 Construct composite reliability. Construct composite reliability was assessed
by examining the calculated composite reliability scores (Pavlou and Gefen, 2005;
Werts et al., 1974). The figures in Table I indicate that the degree of construct reliability
is acceptable, since reliability scores either exceed 0.90 or they are very close to 0.90.
3.3.5 Construct discriminant validity. Construct discriminant validity was assessed
by examining whether the correlation coefficients between pairs of constructs were

62.98
69.17
73.17
81.53
80.21

0.863
0.889
0.730
0.795
0.795

0.841

0.901

0.875

0.856

0.902

20.122
0.089

0.315 * *
2 0.027
0.048

0.357 * *

2 0.060

0.536 * *

0.303 * *
20.063

[0.587]

0.577 * *

[0.737]b

HRM
policies

[0.868]

0.060
0.064

0.063
2 0.049

0.233 * * 2 0.186 * *

2 0.119 *

[0.840]

0.101
2 0.024

[0.761]

1
0.237 * *

Employee Employee Organizational

attitudes behaviors performance Sector Size

P
P
P
Notes: Correlation is significant at: *0.05 and * *0.01; aconstruct reliability i li 2 = i li 2 i 1 2 l2i
where li standardized loading;
b
diagonal figures in brackets represent AVE

3.7709
(0.7599)
HRM policies
3.5086
(0.6916)
Employee attitudes
3.6637
(0.7263)
Employee behaviors
1.8005
(0.7908)
Organizational performance 3.7448
(0.6678)
Sector
Size

Business strategies

Percentage
Mean
of variance Construct Business
(standard
deviation) Cronbachs a explained reliabilitya strategies

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Table I.
Means and standard
deviations, consistency
and reliability measures,
and bivariate correlations
for all the variables used

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significantly different from unity (Gefen et al., 2000), and by examining whether the
square root of each factors AVE is larger than its correlations with other factors (Chin,
1998; Gefen and Straub, 2005; Straub et al., 2004). Table I presents the correlation
coefficients of all constructs used in the study. It is seen that the correlation coefficients
are significantly different from unity, and they are smaller than the square root of each
factors AVE, providing thus evidence for separate constructs.
3.3.6 Testing for multicollinearity. Although some significant correlation
coefficients are above 0.50, multicollinearity among the constructs is not of a serious
concern since all relevant checks such as condition index (largest CI 4.951
less than 10), tolerance values (smallest TOL 0.523 significantly greater than 0), and
variance inflation factors (largest VIF 1.913 less than 10) did not suggest evidence
of significant multicollinearity (Kleinbaum et al., 1988).
3.3.7 Common method bias. Harmans (1967) single factor test was used to examine
the likelihood of common method bias threat (Podsakoff et al., 2003; Straub et al., 2004;
Malhotra et al., 2006). According to this test the simultaneous loading of all items in a
factor analysis, revealed seven factors, and not just one, with the first factor covering
only 12.787 percent of total variance explained, indicating thus that the common
method bias in the data was rather limited.
3.4 Statistical analysis
To test the hypotheses developed of the proposed framework the methodology of
structural equation models (SEM) was used, via LISREL, and the maximum likelihood
estimation (MLE). SEM is effective when testing models that are path analytic with
mediating variables, and include latent constructs that are being measured with
multiple items. We used MLE because tests of departure from normality, skewness and
kurtosis for all variables used were (except for sector and size) within acceptable
statistical limits ( Joreskog and Sorbom, 2004).
We assessed the overall model fit following Bollens (1989) recommendation to
examine multiple indices, since it is possible for a model to be adequate on one-fit index
but inadequate on many others. We used the x 2 test (with critical significant level p .
0.05) and the normed-x 2 ratio (with critical level no more than three or at most five)
(Pedhazur and Pedhazur-Schmelkin, 1991), the goodness-of-fit index (GFI) (with critical
level not lower than 0.90) (Judge and Hulin, 1993), the normed fit index (NFI) (with
critical level not lower than 0.90) (Bentler and Bonett, 1980), the comparative fit index
(CFI) (with critical level not lower than 0.90) (Bentler, 1990), and the root mean squared
error of approximation (RMSEA) (with critical level not more than 0.08) (Steiger, 1990).
4. Results
Table I presents the means, standard deviations, and correlation coefficients of all the
constructs used in the study, derived as weighed averages of confirmatory factor
analyses applied to each group of relevant items. We observe positive and significant
correlations between business strategies, HRM policies, and organizational
performance, thus supporting H1, H2 (and may be H7) and H3, respectively.
Similarly, we see positive and significant correlation between employer HRM policies
and employee attitudes, thus supporting H4. Also, we observe negative and significant
correlation between employee attitudes and behaviors, thus supporting H5. In addition,
we see negative and significant correlation between employee behaviors and

organizational performance, thus supporting H6. Finally, with respect to controls we

see in Table I that there are no significant correlations between controls and the rest of
the variables used in the study, giving thus no support for H8.
However, results based on correlations, although interesting, may be misleading
due to the interactions between several variables. Therefore, in order to isolate the
possible links between the variables involved in the operational model shown in
Figure 1, the estimated path diagram for this proposed framework is shown in Figure 2.
The circles represent the related latent variables and the bold arrows indicate the
structural relationships between the corresponding variables. The numbers that are
assigned to each arrow show the estimated standardized coefficients. The GFIs
confirmed the validity of the operational model (x 2 1,625.83, df 456,
p-value 0.000, normed-x 2 3.56, RMSEA 0.074, CFI 0.97, NFI 0.93, and
GFI 0.86). Although GFI is lower than the critical level of 0.90, it is still accepted
because this index can take values as low as 0.80 or even as 0.70 in cases of complex
models ( Judge and Hulin, 1993; Hart, 1994), such as the model shown in Figure 1.
The results in Figure 2 show the following:
.
Business strategies have direct, significant, and positive influences on
organizational performance (b 0.41, p , 0.001) and on HRM policies
(b 0.59, p , 0.001), thus supporting H1 and H3, respectively.
.
HRM policies have no direct influence on organizational performance, thus
giving no support for H2.
.
HRM policies have direct, significant, and positive influence on employee
attitudes (b 0.54, p , 0.001), thus supporting H4.
.
Employee attitudes have direct, significant, and negative influence on employee
behavior (b 2 0.19, p , 0.02), hence supporting H5.
.
Employee behavior has direct, significant, and negative influence on
organizational performance (b 2 0.16, p , 0.05), thus supporting H6.
.
Organizational performance has direct, significant, and positive influence on
HRM policies (b 0.21, p , 0.001), thus supporting H7.
.
Business strategies and organizational performance are directly controlled by
sector and size, therefore partially supporting H8.
We must note here that with respect to controls we tried all possibilities linking
controls with all the other constructs (Paauwe and Richardson, 1997), and the only
significant results obtained are those reported in the final model shown in Figure 2.
Furthermore, from these results it is seen that employee attitudes and behaviors
serially and fully mediate the relationship between HRM policies and organizational
performance. Additionally, HRM policies partially mediate the relationship between
business strategies and organizational performance (Baron and Kenny, 1986).
5. Discussion
The first objective of the paper was to investigate whether in small firms HRM policies
influence organizational performance through employee attitudes and behaviors. The
results in Figure 2 reveal several interesting things. First, employee attitudes fully
mediate the relationship between HRM policies and employee behaviors.

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145

Cost

0.63

0.82

Distribution
Channels

Improvement
of Service
0.18***

Business
Strategies

0.59

Training

0.76

0.65

0.72

0.21

Sector

0.84

Controls

0.84
Commitment

0.91

0.55

Employee
Behaviours

0.77

Size

0.47

Motivation

0.19*

0.82

0.68

0.59

0.65

0.24*

0.41

Organizational
Performance

0.87

Grievances

0.16**

Turnover

Communication

Involvement

Participation

Absenteeism

Employee
Attitudes

0.72

0.73

0.55

Satisfaction

0.54

Incentives

Promotion

Compensation

Human Resources
Management Policies

Performance
appraisal

Work design

Notes: No star p < 0.001, *p < 0.02, **p < 0.05, ***p < 0.07

0.83

Quality
enhancement

Wide range of
0.61
products

Improvement
of goods
0.86

0.74

0.55

0.70

0.71

0.71

0.74

0.78

0.77

146

Innovation

0.51

0.63

Flexible work

Prices

Figure 2.
Estimation results
of the hypothesized model

Selection

Recruitment

Stakeholders
Satisfaction

Development

Efficiency

Effectiveness

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Second, employee behaviors fully mediate the relationship between employee attitudes
and organizational performance. Third, considering that there is no any significant
direct link between HRM policies and organizational performance, employee attitudes
and behaviors serially and fully mediate the relationship between HRM policies and
organizational performance. Specifically, considering the largest standardized
coefficient in each group of related items, it seems that recruitment, training,
promotion, and communication, are the most important HRM policies that improve
employee satisfaction. Additionally, improved employee satisfaction makes employees
to reduce their tendency to make grievances in the organization, resulting thus in
higher organizational efficiency, i.e. if the organization uses the fewest possible
resources to meet its objectives. Thus, this study supports the core philosophy of the
RBV perspective, whereas HRM policies have a direct impact on employee attitudes,
which subsequently influence employee behaviors that in turn affect organizational
performance (Boxall and Steeneveld, 1999; Guest and Conway, 2004; Perryer et al.,
2010). Considering this finding, the forward causal chain it is supported in the
proposed HRM-organizational performance relationship. This is important because it
indicates that this chain holds true in small firms as it is believed to hold true in large
firms (Gilbert and Jones, 2000; Kerr and McDougall, 1999; Kok and Uhlaner, 2001).
With respect to the contingency perspective the results in Figure 2 reveal that small
business in Greece put more emphasis on the improvement of goods, quality
enhancement, and improvement of service. This is mainly because Greek small firms
believe that it is very difficult compete imported goods which are very cheap with
respect to domestic goods, and therefore, firms are trying to gain competitive
advantage through innovation and quality. Accordingly, small firms in Greece
following an innovation strategy put more emphasis in training and development
(highest standardized coefficient) due to the fact that they need to develop not only the
knowledge and skill of their employees, but also attitudes in order to encourage
creativity, flexibility, propensity to take risks and the co-operation that this strategy
requires to be implemented with success (Sanz-Valee et al., 1999). Similarly, small
Greek firms following a quality strategy also pay extensive attention on training and
development in order to stimulate co-operation and obtain the continuous
improvement that quality implies (Sanz-Valee et al., 1999). Additionally, firms that
follow innovative or quality enhanced strategies put more emphasis in promotion
arrangements (second highest standardized coefficient) because they have more need
of a longer term orientation of employees (Schuler and Jackson, 1987). Generally, the
emphasis of the HRM policies with respect to the innovation strategy facilitate
cooperative, interdependent behavior that is oriented toward the longer term, and
foster exchange of ideas and risk taking. The emphasis of the HRM policies with
respect to the quality strategy facilitate quality enhancement by helping to ensure
highly reliable behavior from individuals who can identify with the goals of the
organization (Schuler and Jackson, 1987). These results suggest that business
strategies are followed by HRM policies in determining business performance (Katou
and Budhwar, 2010). Thus, this study supports the contingency perspective, which is
represented by the link between business strategies and HRM policies. Specifically,
this link is stronger between the business strategies of improvement of goods, quality
enhancement, and improvement of service and the HRM policies of recruitment,
training and development, promotion, and communication. Additionally, considering

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148

that the standardized coefficient of the business strategies-HRM policies link is rather
large, it seems that Porters (1985) generic strategies used in the study are relatively
powerful predictors of organizational performance (Youndt et al., 1996), and these
strategies are expected to reinforce organizational performance (Snell and Dean, 1992;
Youndt et al., 1996).
The second objective of the study was to investigate whether reverse causality
exists in the HRM policies and organizational performance relationship. Prowse and
Prowse (2010) argue that reverse causality is a critical issue that should be tested. With
respect to the forward causality we found above that HRM policies influence
organizational performance through employee attitudes and behaviors. We found that
this influence was contingent on business strategies. However, considering the results
in Figure 2 the total standardized effect attributed to HRM policies is rather very small
and it is computed (via LISREL) to be equal to 0.02 (standard error 0.01, exact
significance level 0.107). With respect to the reverse causality we found that
organizational performance influences the adoption of HRM policies, supporting thus
H7. In this case the total standardized effect is much higher and is computed to be
equal to 0.22 (standard error 0.07, exact significance level 0.000), indicating that
for small Greek firms instead of HRM policies leading to high organizational
performance, it is the highly performing firms that can afford HRM policies (Huselid,
1995; Ichniowski et al., 1997; Gerhart, 1999). This result means that in Greek small
organizations it is the high-performing and resource-rich organizations that further
invest in HRM, such as employee training and development and higher compensation
packages, than the low-performing organizations. Thus, in the HRM
policies-organizational performance relationship reverse causality is much stronger
than forward causality. A similar result has been found by Schneider et al. (2003).
Additionally, the improvement of organizational performance depends much more
heavily on the business strategies followed (total standardized effect 0.42 (standard
error 0.09, exact significance level 0.000)), compared to the extent of the HRM
policies adopted. This finding is important because it indicates that business strategies
constitute the initial driver that improves organizational performance.
The third objective was to investigate the relationship between HRM policies and
organizational performance, in the Greek context, which is reflected in the organizational
controls of the study. One would expect heterogeneity of organizations, in terms of sector
and size, to substantially affect the HRM-performance relationship (Youndt et al., 1996;
Boxall, 2003). However, considering the results in Figure 2 it is seen that in the case of the
Greek small organizations the associations indicated are restricted to the two end-points
of the relationship, i.e. business strategies and organizational performance. Specifically,
trade organizations show higher efficiency and effectiveness compared to service and
manufacturing organizations. Additionally, within the size limits of the organizations in
the study, small organizations show lower efficiency and effectiveness compared to the
smaller organizations. Furthermore, the results indicate that trade organizations put less
emphasis on innovation and quality strategies compared to service and manufacturing
organizations. Moreover, within the limits of the small organizations in the study, small
organizations put more emphasis on innovation and quality strategies compared to
smaller organizations.

6. Conclusions
It may be said that this study is partially in line with Paauwe and Richardson (1997),
Boselie et al. (2005) and Purcell and Hutchinson (2007) high-performance models
developed in the US/UK context, where employee attitudes and behaviors mediate the
relationship between HRM policies and organizational performance, and partially in
line with Katou and Budhwar (2010) causal relationship model developed in the Greek
context, where business strategies influence organizational performance through HRM
policies and outcomes. Thus, this research contributes to the literature by integrating
in a general conceptual model in the Greek small businesses context the drivers of
business strategies and HRM policies in determining organizational performance.
Furthermore, this research employing the concept of bi-directional causality between
HRM policies and organizational performance takes the literature a step ahead by
investigating how HRM policies affect organizational performance through employee
attitudes and behaviors, and vice versa.
Specifically, in answering the three research questions set in the introduction of this
study, we may say that with respect to the first question HRM policies, being
contingent on business strategies, have a positive effect on organizational performance
in the Greek private small business manufacturing, services and trade sectors context.
Furthermore, the study supports the view that employee attitudes (satisfaction,
commitment, and motivation), and employee behaviors (absences, turnover, and
disputes), serially mediate the relationship between HRM policies and organizational
performance (Conway and Monks, 2008). With respect to the second question, the
study supports the view that although HRM policies do not directly lead to high
organizational performance, it is high-performing firms that can directly afford HRM
policies (Boselie et al., 2005; Van Veldhoven, 2005; Wright and Gardner, 2003). Finally,
with respect to third question, the study supports the view that there is no any
universalistic model but in contrast there are contingency models depending on
business strategies and organizational factors (sector, size) influencing the
HRM-organizational performance relationship (Boselie et al., 2003).
6.1 Implications
This study has a number of clear implications for both managers and decision makers.
Notably, the major implications of the study are as follows:
.
Organizational performance depends more heavily on the business strategies of
innovation and quality than on the cost strategy. Specifically, organizations
should put more emphasis on improvement of goods, quality enhancement, and
improvement of service than on trying to cut costs and prices. This is because it
is rather difficult for small organizations to gain returns on scale.
.
Organizational performance depends on HRM outcomes such as attitudes of
employees with respect to satisfaction and commitment, which in turn reduce
grievances and absences of employees. Thus, managers should pay closer
attention to employees attitudes before negative behaviors occur by
communicating and by listening to their employees concerns.
.
Attention should be given to the careful implementation of HRM policies with
respect to recruitment, training and development, promotion, and
communication, because these broad areas of policy constitute the most

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.

150

important determinants of employee attitudes. Thus, managers should not give

idealistic promises during recruitment.
Aligning the business strategies of improvement of goods, quality enhancement,
and improvement of service with the HRM policies of recruitment, training and
development, promotion, and communication is vital to success.

6.2 Limitations
The conclusions above, nonetheless, should be treated with caution. This is because the
study has some limitations. First, the data were collected using a questionnaire at a
single point in time. As a result, the study does not allow for appropriately
investigating dynamic causal inferences (Wright et al., 2005). However, cross-sectional
studies that examine the impact of HRM policies on organizational performance are not
vacuousness in investigating the causal direction of the relationship. This is because
although time-lags are not present in order to test time-dependent reverse causation
(Wright et al., 2005), instant changes can empirically demonstrate through
simultaneous equation systems the causal order (Gujarati, 2003). Thus, the field
would greatly benefit from some time-series or longitudinal studies in the future, where
the lagged effects of employee attitudes and behaviors may further contribute to our
understanding of how HRM policies contingent on business strategies improve
organizational performance. Second, to minimize possible common method bias
concerns data should be gathered from independent sources (Podsakoff and Organ,
1986). Third, the study was applied in the context of small firms operating in Greece,
which has unique labor relations and institutional conditions, and thus the findings
from the Greek sample may not generalize across borders (De Jong et al., 2009).
However, despite these limitations, this study provides a greater understanding of the
process by which business strategies and HRM policies, influence employee attitudes
and behaviors, which in turn improves organizational performance.

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About the author
Anastasia A. Katou is a Lecturer in the Department of Marketing and Operations Management
at the University of Macedonia, Thessaloniki, Greece. Her research interests include human
resource management, organizational behavior, and business strategies, with a focus on
organizational performance. She received a BA and an MBA from the University of Sunderland,
UK and a PhD and a PgD from the Cardiff University, UK. She has published numerous articles
in academic journals, such as the International Journal of Human Resource Management,
Thunderbird International Business Review, Employee Relations, Global Business and
Organizational Excellence, Multinational Business Review, European Journal of International
Management, European Management Journal, Personnel Review, International Journal of Human
Resources Development and Management. Anastasia A. Katou can be contacted at:
akatou@uom.gr

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