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Bleak house or bright prospect?Human resource management in Australian SMEs

Retha Wiesner and Jim McDonaldUniversity of Southern Queensland

wiesner@usq.edu.au

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Correspondence to: Assoc. Prof. Retha Wiesner, Faculty of Business, University of SouthernQueensland, Toowoomba Qld 4350; fax: +617 4631 1172; e-mail: wiesner@usq.edu.au

This study fills the gaps in existing research on HRM in Australian SMEs byconsidering a wide range of standard human resource (HR) practices and someindustrial relations practices. The small business sector has been regarded as thenatural home for ’bleak house’ human resource management practices typified bylow uptake of human resource practices, little or no collective representation ofemployees and little or no employee participation. The results, reporting anational study (n = 1435) on human resource management practices inAustralian SMEs, reveal a moderate take-up of human resource managementpractices. These findings by themselves do not support what Storey has called the’bleak house’ scenario in Australian SMEs. However, there are factors that mayhave a negative impact on the relative positive picture portrayed in this study,when the impact of organisational size, the presence of a HR manager andprevalence of a strategic plan on the uptake of HR practices in SMEs areconsidered, together with low unionisation, low employee participation and a lowincidence of collective practices.

Keywords: human resource management, bleak house, small business, SMEs

Organisations face unprecedented challenges in the contemporary environmentof accelerated social and economic change. While there is extensive literature onhuman resource management (HRM), the majority of published work focuseson HRM in large organisations. Although small and medium enterprises(SMEs) have significant importance for national economies, HRM practicesreceived limited emphasis in the small business or SME literature until the early1990s (Purcell 1993).

Interest in small business and SMEs has since grown. Some studies haveconsidered the broad application of small business HR practices at national level,for example, in Canada (Golhar and Deshpande 1997) and the United Kingdom(Bacon, Ackers, Storey and Coates 1996). Bacon et al. found that UK small busi-nesses were prone to adopt HR practices, but, by contrast, Duberley and Walley(1995) revealed a lack of strategic HRM in SMEs in the United States. Gilbert

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and Jones (2000), in an interview program with 80 owner/managers, found thatHR practices in New Zealand small businesses were predominantly informal.Many national studies of HR practices are meta analyses of wider surveys. In ananalysis of survey data on selected industry-region combinations in Canada,Weber and Verma (1998) found that SMEs are more likely to innovate whenpursuing external and functional flexibility strategies. Using the 1990 UKWorkplace Industrial Relations Survey, Bryson and Millward (1998) founddifferences in employee involvement practices between small firms and largerestablishments. Similarly, Rimoldi (1998) utilised Argentine’s 1994 EconomicCensus data to analyse collective bargaining in small enterprises.

In Australia, the two Australian Workplace Industrial Relations Surveys(AWIRS) in 1990 and 1995 have also dealt with SMEs only as part of largerresearch. However, during the 1990s interest in industrial relations in smallbusiness led to specific attention being given to this sector in the report of the1995 AWIRS (Morehead, Steele, Alexander, Stephen and Duffin 1997),followed by a study of the AWIRS data which challenges assumptions aboutindustrial harmony in small business (Barrett 1998). Other topics in smallbusiness based on AWIRS and other survey data have included unionisation,award coverage and over-award payments, agreements, enterprise bargainingin SMEs, and employee participation (Barrett 1995; Barrett 1997; Barrett andButtigieg 1999; McDonald, and Wiesner 1997; McDonald and Wiesner 1999;Thorpe and McDonald 1997), together with various other aspects of industrialrelations in Australian small business (e.g., Barrett 1995; Callus, Kitay andSutcliffe 1992; Isaac 1993; Kitay and Sutcliffe 1989). Sappey (1985) consideredthe employer associations, unions and the state contexts of industrial relationsin micro-businesses.

Examples of regional studies of HRM in small businesses or SMEs can befound in the United States (McEvoy 1984), Canada (Wagar 1998) and Italy(Golzio 1998). Regional studies in Australia have been conducted in Queensland(Kotey 1999; Kotey, Slade and Gadenne 2000; McDonald and Wiesner 1996;Wiesner, McDonald and du Plessis 1997) and in the Illawarra region of NewSouth Wales (Markey, Hodgkinson, Murray, Mylett and Pomfret 1997).

Comparative studies of HRM in small and large firms have beenconducted in North America (Desphande and Golhar 1994; Marlow andPatton 1993). For example Galang (1998) conducted a comparative study ofhigh performance work practices in chemical, petroleum refining, rubber,leather, metal and machinery manufacturers.

Studies of specific HR practices in small business and SMEs are morecommon. Examples include studies of training or recruitment and retentionof employees (Barber, Wesson, Robertson and Taylor 1999; Heneman andBerkley 1999), selection (Field and Gatewood 1987), the use of the internet inselecting and employing potential workers (Mclarty 1999), the link betweentraining and business performance (Storey 1999), teams in SMEs (Wiesner andMcDonald 1998), and performance appraisal (Wiesner and McDonald 1997).

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This growing interest in research on HRM in small business or SMEs hasled to the inclusion of references to the sector in a recent ’Australianised’ HRM

strategy textbook (Dessler, Griffiths, Lloyd-Walker and Williams 1999).Dessler et al., however, merely intersperse their chapters with occasional SMEvignettes and there is little reference to Australian SMEs in the text proper.Until this research, there have been no comprehensive studies on a nationalscale undertaken which focus on human resource management in the SMEsector or indicate the emergence of a national SME profile in Australiaregarding management of HR issues. The contribution of this study is toreport the findings of the first national survey of HR practices in AustralianSMEs, which will inform future research and scholarship in the area.

The Australian SME context

SMEs are defined variously in different countries and across industry sectors(Cutcher-Gershenfeld, McHugh and Power 1996; Osteryoung, Pace andConstand 1995; Storey 1994; von Potobsky 1992). Size, as determined by thenumber of employees in the organisation, is the most common element of def-initions of small business and SMEs (Atkins and Lowe 1996). The AustralianBureau of Statistics (ABS), for example, applies different size categories forsmall business depending on the industry sector. Thus, a small organisation isdefined by the ABS as fewer than 100 employees in the manufacturing sectorand fewer than 20 in retail, wholesale, construction and service sectors (Johnsand Storey 1983). The ABS small business classification also requires that anenterprise be independently owned and operated, closely controlled by theowner/managers who contribute most if not all of the operating capital andwith the principal decision-making functions resting with the owner/managers(ABS 1999).

Following Baron (1995), we define SMEs simply as organisationsemploying between 20 and 200 employees. We used 20 employees as the lowestextremity for size because the research project is about human resource

management and organisational change. SMEs with a workforce with morethan 20 employees will be expected to have a management structure. In thisstudy, small businesses are constituted by 100 or fewer employees (applying theABS definition of small business in manufacture to all industries) andmedium-sized businesses range from 101 to 200 employees.

During the 1950s and 1960s the average growth in gross domestic productwas 5 percent in the OECD. From 1970, there were three major internationalrecessions and slower growth in OECD countries, including Australia, andeconomic restructuring on a global scale (Fagan and Webber 1994). At thesame time, corporate survival and national economic growth became increas-ingly dependent on international competition which was fuelled by advancesin technology and communications and the reduction of trade barriers

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(Dunphy and Stace 1992). Australia experienced the effects of slowed economicgrowth through decreased demand and price for commodities, competitionfrom rapidly expanding Asian economies, and international expansion byAustralian companies. Domestically, the 1987 stock market crash andeconomic recession of the early 1990s also impacted on Australian organisa-tions. The agenda for this reform included tariff reduction and internationaltrade agreements, deregulation of financial markets, tax reform and industrialrelations reform (Limerick 1992). In this context it is significant that duringthe 1980s the number of employees in Australian SMEs increased, even duringthe 1990-91 recession (Bureau of Industry Employment 1994; Hemmings1991). SMEs grew at a moderate rate of 3 percent and medium-sized businessby 4 percent from 1986/87 to 1998/99 while employment in the sector grew bya modest 3 percent (ABS 1999).

In response to the economic turbulence of the 1980s and 1990s, Australiangovernments engaged in macro- and micro-economic reform in an attempt toincrease the international and domestic competitiveness of Australian enter-prises. This has been reflected in a growing emphasis upon the role of HRMas a source of competitive advantage (Dessler et al. 1999). The Karpin Reportregarded SMEs as having flexibility, speed, innovation and creativity. SMEswere thus regarded as playing a pivotal role in focusing on the behaviouraland interpersonal aspects of leadership and management required byAustralian industry to address the challenges of globalisation (Karpin 1995,10). However, despite the importance of small business and SMEs to theeconomy, there has been a shortage of data during this past decade concerningthe broad nature of the patterns and trends in human resource managementin SMEs.

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In ascertaining the prevalence of HR practices in SMEs, Sisson (1993)raises the question of whether there was any evidence of ’good practice’ in non-unionised small and medium-sized firms in the UK. Sisson defines ’bleakhouse’ as absence of human resource practices or a trade union. The assump-tion is that employees are more likely to be treated in an unfair and arbitraryway in organisations that are characterised by an absence of human resourcepractices. The ’bleak house’ scenario suggests neither collective representationnor employee participation and involvement in HR practices, a situationdescribed by Guest and Conway (1999) as a ’black hole’ and authoritarian(Metcalf 1995).

Five research questions were designed for the purposes of this paper toascertain whether there is any evidence of a ’bright prospect’ in the HRpractices found in Australian SMEs. A bright prospect suggests that there is ahigh rate of adoption of HR practices, especially in relation to those which havea participative element, because, according to the literature, such practicesmake a significant contribution to organisational performance (Banker, Field,Schroeder and Sinha 1996; Huselid 1995). The first research question addressesthe prevalence of HR and employment relations practices. Second, we asked

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to what extent the size of an SME impacts upon the adoption of HR andemployment relations practices. The third research question refers to theimpact of the presence of a human resource management specialist on HRpractices in SMEs. Fourth, we asked whether the presence of a strategic planimpacts on HR practices in SMEs. Finally, we address the issue of whetherunionisation affects the presence of HR practices in SMEs.

Methodology .

The questionnaire measuring HRM and organisational change practices wasoriginally developed for a study of Queensland SMEs during 1997. Thecontent validity was determined by asking a panel consisting of SMEmanagers, HR experts and academics in HR to comment on the suitability ofeach item. The reliability analysis indicated Cronbach Alpha Coefficients ofbetween 0.80 and 0.90 for each section. There were some minor revisions tothe questionnaire after analysing the results for the Queensland study, in orderto adapt the questionnaire for use in a national context. The questionnaire isdivided in three parts: demographic variables, HR practices, and organisationalchange practices. This paper reports on the results of the first two parts of thequestionnaire. The following HR practices were examined as part of thesecond section of the questionnaire: recruitment, selection, compensation,training and development, performance appraisal, employment relationspractices and HR policies and procedures.

The questionnaire was sent out to 4000 Australian small and medium-sized enterprises during October 1998. A Dun and Bradstreet database wasused and a stratified sample according to the following criteria was employed:all ABS industry categories excluding agriculture; employee size between 20and 200 employees; a personalised address label targeting the CEO or MD;and representation of each state and territory in Australia. The highest propor-tion of questionnaires was received from NSW (32%), followed by Victoria(30%), and Queensland (17%). The ACT, Northern Territory, South Australia,Western Australia and Tasmania comprised the other 12 percent of the sample.Action to encourage organisations to respond to the survey included a coveringletter explaining the purpose of the survey, provision of a reply paid envelope,follow-up letters, an assurance of confidentiality, and participation in a drawfor a one-day, tailor-made workshop for recipients who provided contactdetails.

After allowing for incorrect mail addresses and closed businesses (approx-imately 6 percent or 237 questionnaires of the total sample), a response rate of36 percent was achieved (n = 1435) by February 1999.

The prevalence of the HR practices was measured by asking respondentsto what extent these practices occurred in the previous three years - ’never, forsome jobs, for all jobs’. In analysing the data, the existing scales were collapsed

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into two-point scales reflecting the presence or absence of a practice. SPSS wasused to analyse the data. Descriptive statistics were used to describe the demo-graphics and summarise the data. These are presented in the form of

percentage distributions in order to identify trends in the data. A chi-squareanalysis was used to determine whether there were significant differences inrelation to HR practices between small and medium organisations, SMEs withand without a HR manager, organisations with and without a strategic plan,and unionised and non-unionised SMEs. The wording presented to respon-dents to determine the presence of a HR manager was: ’is there a manager inthis organisation whose principle responsibility cover human resource manage-ment and who has one of the following terms in their title: (1) There is nospecialist manager (2) Industrial Relations (3) Employee Relations (4) HumanResource Management (5) Personnel (6) Other (please specify)?’ This questionwas re-coded into two categories to reflect the presence or absence of a HRmanager.

Demographic profile of Australian SMEs and respondents

Small businesses (fewer than 100 employees) constituted 77 percent of thesample, and 100-200 employees 23 percent. The ABS industry categories wereused to describe the main operations of the organisations. More than one-thirdof organisations (36%) were in the manufacturing category. Each of theremaining categories represented less than 10 percent of the respondents.Forty-six percent of organisations were family organisations of which familymembers managed 60 percent of these organisations. Fifty-seven percentexported their products or services, of which 85 percent had been exportingfor more than three years. Only 5 percent of SMEs were franchise operations.

One-third of organisations (34%) operated from a single location, 58percent of SMEs operated in 2-10 locations and the remainder in more than10 locations. Nine out of ten SMEs could be said to generally be ’surviving’businesses, with almost all of them having been established for more than 10

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years (90%). Seven percent of the organisations that had been in operation for5-10 years and younger organisations (< 5 years) represented 3 percent of thesample. As expected, most SMEs (69%) did not have a designated managerwhose principal responsibility covered human resource management. A HRdepartment was found in only 22 percent of SMEs. Fifty-three percent ofrespondents said their organisation has at least one union member, with morethan two-thirds of the sample (67%) estimating that there was either less than10 percent union membership or no union membership at all amongemployees. Sixty-six percent of respondents reported the existence of aformalised strategic plan and 78 percent a business plan. Most SMEs (89%) ofrespondents had access to the internet; however, only 18 percent had usedhuman resource information systems.

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As far as the personal demographics of respondents are concerned,77 percent had a post-secondary school qualification, 72 percent were olderthan 45 years, 52 percent were owners or part owners of their companies, andonly 13 percent were female.

Human resource practices in SMEs

This section summarises the prevalence of 5 HR practices, including a rangeof collective employment relations practices, and some HR policies and proce-dures. The data are presented in table 1.

HR practices in Australian SMEs

Overall, the results in table 1 suggest a moderate level of adoption of standardHR practices overall. We defined a high level of adoption of an individual HRpractice as occurring where 70 percent or more of SMEs employed that practice.There was a high level of adoption in 4 out of 13 recruitment practices, 8 outof 12 selection practices, 7 out of 11 training and development practices, 3 outof 5 performance appraisal practices, 8 out of 12 compensation practices, 1 outof 9 employment relations practices, 3 out of 4 communication practices and 1out of 5 HR policies.

Responses indicated that recruitment practices are largely conventional,with over 9 out of 10 SMEs utilising newspaper advertisements for recruit-ment. Radio, television and magazine advertising media were clearly not achoice for most SMEs. The results also indicate that a range of recruitment

practices was utilised. A very small proportion of SMEs used internet recruit-ment. While 89 percent of respondents had access to the internet, this resultmay reflect some resistance to, or scepticism about, the use of the internet forrecruitment. However, considering that this survey was done two years agoand that use of the internet has grown considerably in that period, one wouldexpect the picture to have changed. Recruitment practices were significantlymore prevalent in medium-sized enterprises (9 of 12 practices), where therewas a HR manager (8 practices), and where there was a strategic plan(7 practices). However, in organisations with no HR manager or strategic plan,government employment agencies were used to a significantly greater extent.The absence of a strategic plan was also significant for the use of walk-ins asa recruitment strategy. There was a significant positive relationship betweenunion membership and only 4 recruitment practices.

In selection, 92 percent of SMEs in the survey employed written jobdescriptions, and 88 percent conducted job analyses. Although one-on-oneinterviews featured strongly, a small proportion of SMEs did not seem to useinterviews at all. There was a mix of formal and informal selection processes

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Table 1 The prevalence of HRM practices in Australian SMEs

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*

p < 0.05 # practices characterised by formality1 ’Unionisation’ refers to the estimated presence of at least one union member in the workforces (Callus et at.

1991).2 i.e., apprenticeships, training of young employees, retraining of older employees, especially due to demand innew technology3 i.e., leadership, supervisory skills, personal communication, graduate and postgraduate sponsorship

used in appointing employees, with formal selection procedures predominating(86%) over informal methods (75%). However, formal selection procedureswere used to a significantly greater extent in medium-sized organisations.Employees had limited input in the selection decision. A significantly higheruptake of selection practices characterised medium-sized organisations (9 ofthe 12 practices), SMEs with a HR manager (8 practices) and SMEs with astrategic plan (9 practices). Informal selection procedures and one-on-oneinterviews were more prevalent in organisations where there was no HRmanager, or no strategic plan in place, or where there was no union member.As expected, line managers were significantly more likely to make selectiondecisions where there was no HR manager. For only 4 of the practices did thepresence of union members have a significant positive impact.

Almost all SME managers claimed to provide training and developmentwithin their organisation; however, only 61 percent had a formal budget alloca-tion for training. More than three-quarters introduced formal training in thethree years prior to the survey where previously there had been none, with 71percent also reporting that they had increased training where a program hadpreviously existed. The results indicate that there was a high incidence of formaltraining in apprenticeships, the training of young employees and the re-trainingof older employees, especially due to demands made by new technology.

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Attention was also paid in most organisations to training in leadership, super-visory skills, personal communication, and graduate and postgraduate sponsor-ship. However, the survey did not differentiate the features of technical andvocational training suggested here, nor the managerial and supervisory elements.Answers to other questions relating to training and development suggest that,as with the mentoring issue, these aspects were predominantly unstructured andinformal. A mix of internal and external providers ran formal training in theorganisation. There was a significant positive relationship between the adoptionof training and development practices and organisational size (8 out of11 practices), the presence of a HR manager (9 practices), a strategic plan(9 practices) and union membership (7 practices). Informal mentoring was sig-nificantly more likely in SMEs in which there were no union members.

It appears that SMEs employed both formal and informal modes ofperformance appraisal to a similar extent. The most common aspect of per-formance appraisal in SMEs was the setting of objectives and, presumably,evaluating performance against goals set. However, the results indicate thatfewer than half of the respondent organisations used more complex appraisalsystems such as rating scales. Very few employed narrative essay forms. Theresults suggest a heavy reliance upon management and supervisor control ofappraisal functions within organisations. A significant positive relationshipexisted between performance appraisal and organisational size (4 out of5 practices), the presence of a HR manager (all practices) and a strategic plan(3 practices). Unionisation had the least significant impact on performanceappraisal with only one practice occurring significantly in non-unionisedorganisations.

A wide range of compensation practices was employed. However, theresults indicate that there was a low uptake of those practices which had aparticipative component, such as group/team incentive programs, profit/gainsharing schemes and employee share schemes. Performance-based pay andskills-based pay were found in most SMEs, but so too was a reliance on awardsfor pay and classification decisions. Eighty-nine percent of Australian SMEsclaimed that they paid competitive wages. Ninety percent of SMEs employedjob evaluation in setting pay levels. Other compensation practices that featuredvery strongly were annual bonuses, benefits other than superannuation andrecognition of employees in other ways than take-home pay. Medium-sizedbusinesses were significantly more likely to adopt 6 of the 12 specific com-pensation practices than small businesses. There was a positive significantrelationship between the following: the presence of a HR manager and thosecompensation practices involving incentive plans and seniority-based pay;between a strategic plan and 9 compensation practices; and between unionmembership and only 2 practices (pay levels based on awards classification andjob evaluation). There were significant negative relationships between, first, astrategic plan and pay levels based on awards classification; and, second, union-isation and 5 compensation practices.

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Employment relations practices referred to a number of specific participativepractices. These practices constituted the lowest uptake, with only one practice- the striking of formal agreements with employees - adopted by 70 percent ofSMEs. Individual contracts occurred in almost half of the SMEs surveyed. Otherforms of agreement making - whether formal or informal, and whether withemployees or with unions - were found in a minority of SMEs (less than 30%).Individual contracts with non-managerial employees (44%) and the establish-ment of work-teams (47%) were also implemented in a minority of SMEs. Therewas a significant, positive relationship between the employment relationspractices identified and organisational size (all practices), a HR manager(7 practices), a strategic plan (8 practices) and union membership (5 practices). Anegative significant relationship existed between union membership and thepractice of individual contracts with non-managerial employees.

Five HR procedures and policies were identified, of which three relate tolegislative requirements. Even though the implementation of legislativerequirements suggests the need for policies on occupational health and safety,sexual harassment and EEO/affirmative action, a quarter of the SMEs in thesample did not indicate an occupational health and safety policy, less than half(47%) had sexual harassment policies, and 55% had EEO or affirmative action

. policies. A fourth related to employee assistance programs (20%) and theexample provided was a substance abuse program. The final policy referredto the sharing of business information with employees (58%). Around one-halfof the sample did not respond to this section of the questionnaire, perhapssuggesting some reluctance to provide sensitive information to the researchers.A significant positive relationship existed between HR policies and proceduresand SME size (4 of the 5 items), a HR manager (3 items), a strategic plan (all5 items) and union membership (4 items). An employee assistance programand a policy of sharing business information with employees occurred sig-nificantly more in organisations without a HR manager.

Bleak house or bright prospect?

To determine whether SMEs could be described as bleak houses or having abright prospect, we have tailored our discussion around the five researchquestions, the first of which relates to the level of adoption of HR practices,policies and procedures in Australian SMEs.

The prevalence of HR practices

. The significance of this research question relates to the contribution HRpractices and systems make to organisational performance. HR practices andpolicies have been shown to have positive effects on organisational perform-ance, profitability, shareholder return and organisational survival (Banker et al.

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1996; Huselid 1995). The overall picture in our survey suggests a moderateimplementation of HR practices in Australian SMEs. Seventy-three practiceswere identified. Less than two-thirds (66%) of the 5 HR practices (recruitment,selection, training and development, performance appraisal and compensation)were adopted by a majority of SMEs in the sample. However, only 36 of the73 practices had a high level of adoption. According to these results, SMEshave only a moderate affinity for the ’bright prospect’ rather than Sisson’s’bleak house’ scenario.

Fisher and Dowling (1999) reported that in the previous five years,performance appraisal, recruitment, selection, and training and developmentwere identified by senior HR managers as the most important new HRpolicies, programs and systems in large Australian firms. The results in oursurvey of HR practices in Australian SMEs support the emphasis on those HRpractices and are in keeping with the UK picture of people management insmall firms (Bacon et al. 1996). Desphande and Golhar (1994) caution,however, that what managers perceive as important may not actually bepractised by them. McEvoy (1984) observed that HR practices in small busi-nesses stood to benefit from modernisation and improvement.

Storey (1992) identified enhanced competition as the main causes of theshift towards HRM in UK large firms. We suggest that Australian SMEs havemore specific triggers for adopting HR practices. One explanation may be thefact that 78 percent of SME managers in our survey hold a higher qualificationthan a secondary school certificate. It is true that large organisations are morelikely to have the resources, technical knowledge and skills to implementlarge-scale HR programs and it is also true that the term ’bleak house’ couldbe used to label some SMEs, but the results presented here indicate that itwould be inaccurate to assume they were the norm in the SME sector.

There are, however, factors that indicate that the ’bright prospect’ may berather murkier than indicated by the overall prevalence of HR practices. Theprofile of recruitment and employment relations practices and the incidence ofHR policies and procedures provide a less favourable outlook. The results forthese aspects of employee management demonstrate that there was a high levelof adoption in only 4 out of 13 recruitment practices, 1 out of 9 employmentrelations practices and 1 out of 5 HR policies and procedures. Overall, therewas a low rate of adoption of various recruitment practices. Although compe-tition makes it imperative for organisations to recruit effectively, these practiceswere not of central concern in Storey’s bleak house scenario.

The low uptake of HR participative practices are of more significance forthe effectiveness of both the management of employees and the performanceof the SME, given the claimed links between participation and the perform-ance of firms. First, it leads to increased employee satisfaction; second, improvedproductivity follows participation; and, third, it promotes improved rationalityand legitimacy leading to greater effectiveness of management decision-making (Vaughan 1991). Participation can provide a means for management

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to improve efficiency within the organisation, create industrial harmonybetween management and employees, and provide a forum for grievance reso-lution as well as constitute a means towards industrial democracy within theorganisation (Salamon 1987). In this study, only two practices which may havea participative dimension had a high adoption rate. These practices includedother managers/employees having input into selection design (86%) and formalagreements with employees (70%). Other participative practices below the 70percent threshold for a high level of adoption include employee input inselection decisions (63%), employee self-appraisal (48%), peer performanceappraisals (37%), profit sharing (43%), employee share schemes (16%), groupincentive programs (46%), and 9 of the 10 employment relations practiceswithin the SME environment of unionisation. The ’bright prospect’ is foggedup by the poor performance with respect to participative practices and collec-tive practices.

Size and SME .

The second research question related to the impact of size on the prevalenceof HR practices in SMEs. The results in this study clearly demonstrate thatsize does have a significant impact on the adoption of HR practices. Medium-sized organisations had a significantly higher adoption rate of HR practicesthan small organisations. However, the adoption rate may be ameliorated bySME characteristics accorded small business by previous research. There is,however, no uniformity in the conclusions. Chapman (1999), for example,argues that the essential dynamics of small firms are the same as large onesand that size is only one variable in understanding employee relations in smallfirms. Others argue that the organisational characteristics and managerialpractices of SMEs cannot be assumed to reflect those in large organisations(Granovetta 1984). The point has long been made that ’small business is not alittle big business’ (Welsh and White 1981, 18) and that small businesses facedifferent concerns to those of big business (Heneman and Berkley 1999).Informality of organisational structures and processes (Bacon et al. 1996;Callus, Morehead, Cully and Buchanan 1991; Olsen and Terpstra 1992), forexample, may lead to reporting relationships and processes which differ fromlarger, more formal workplaces.

This informality may be critical because SMEs suffer from the limitedavailability of capital and their role in the marketplace may be less securecompared with larger organisations (Joyce, Woods, McNulty and Corrigan1990), and different management skills and specialised competencies arerequired in managing small or medium-sized organisations. SME managersneed to be flexible and exercise many of the personnel functions which HRmanagers might exercise in large organisations. Business and strategic planningmay have peculiarities specific to small and medium-sized organisations. The

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changeability of the market makes it difficult for small firms to plan for growthand change especially as they may be reliant on the sales of the larger organi-sation they supply or the state of the industry in which they operate (Atkinsand Lowe 1996; Jennings and Beaver 1997; Joyce et al. 1990; Marlow and Patton1993; Martin and Staines 1994). The impact of a turbulent environment on theviability of SMEs is demonstrated by the high exit rates reported by Portrait ofAustralian business (Productivity Commission/DIST 1997) which revealed thatone-quarter of firms with 10 employees or fewer planned to close or sell withinthree years. This rate progressively decreased as size increased. In this presentsurvey 55 firms were reported as no longer operating, representing 3 percentof the initial sample.

Research on small businesses suggests that the factors influencing humanresource management in SMEs are different from those in larger firms. Jenningsand Beaver (1997) believe that small firm management processes are unique andcontemporary management theory principles, no matter how refined, cannot beapplied directly to the smaller enterprises. The management process in the smallfirm may be more influenced by the personal preferences and attitudes of theowner and/or managers than in large firms because of a closer interaction ofmanagement with operations and employees. The permeation of a strong culturefostering adaptation and flexibility may be thus facilitated which can assist inthe implementation of HR practices and in overcoming resistance to change.This is in contrast to large firms where communication of new practices can beproblematic (Jennings and Beaver 1997). The other side of the argument is thatthe significant differences exist between small and large firms in terms of mana-gerial, operational and organisational competencies arising from superior flexi-bility, innovation, and lower overhead costs in small firms despite beingrestricted by a lack of market power, capital and managerial resources (Ahire1996). However, the widely held assumption that small businesses are, by def-inition, flexible should be treated with caution. An SME may lack flexibilitywhere the organisation’s culture is dominated by an owner or chief executivewho is inflexible and rigid (van der Wiele and Brown 1998). Furthermore,medium-sized businesses may lack not only resources but also the flexibility theymay have had as small firms (Welbourne and Cyr 1999). In view of these char-acteristics, it is therefore debatable whether the HR management models asapplied in large organisations can also be applied to SMEs.

There is, however, also a more positive side to these conclusions aboutSMEs. Bacon et al. (1996) suggest that large organisations in the UK may havemuch to learn from the informal nature of change in small businesses. Wesuggest that the same applies to the Australian scenario. Where SMEsimplement HR practices they may have some advantages over large organisa-tions. For example, the informality of organisational structures and relationshipsmay mean that forces that traditionally restrain change or maintain stability haveless influence. However, the descriptive data and other studies do not point toany firm conclusion on this basis. If firms do have a high degree of flexibility,

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their relatively small size means that changes in practices may be adopted morequickly (Marlow and Patton 1993). This is in contrast to large organisationswhere mechanistic and bureaucratic structures can impede the implementationof HR processes (Robins, Waters-Marsh, Cacioppe and Millett 1994).

The results of this survey do indicate that small businesses are moreinformal compared to their medium-sized counterparts. However, in 7 of the22 formal practices identified in table 1, only a minority of firms adopted them.

The impact of a HR manager on HR practices in SMEs

The impact of a HR manager on the prevalence of HR practices is inherentlylinked to small and medium-sized businesses rather than larger organisationsbecause large organisations tend to employ a specialised HR manager and mostoften also have a HR department. Kramar (2000) argues that managers respon-sible for managing people issues, such as the human resource or industrialrelations manager, are seen in larger organisations as being in a partnershipwith other managers and employees through playing a proactive, strategic roleto foster the achievement of organisational success.

The results in this study indicate that the presence of a HR manager playsa significant role in the presence of most of the HR practices (45 items) listedin table 1, except for compensation practices. However, around one-third ofthese were taken up by a minority of SMEs. The significance of this forAustralian SMEs lies in the fact that only 31 percent of SMEs in this studyemployed a dedicated manager responsible for HR. One can argue that thoseSMEs without HR managers use consultants to advise them on HR issues;however, our research shows that it is mainly medium-sized organisations thattake advantage of this option (McDonald and Wiesner 1998). The question forfurther research is whether the presence of a HR manager has a significantpositive impact on the performance of SMEs. Welbourne and Cyr (1999) foundthat, in ’mid-size’ firms, the presence of a senior HRM executive had anegative effect on the performance of the firm.

Strategic plans and HR practices in SMEs

What is the impact of the existence of a strategic plan on the prevalence of HRpractices? A strategic orientation in organisations would require at least thepresence of a corporate strategy. Written and unwritten mission statements,corporate strategies and human resource strategies are characteristics of 90percent of large Australian organisations (Kramar 2000). McDonald andWiesner (1999) found in an interview program with 40 SME managers thatthese managers had difficulty in distinguishing between a strategic andbusiness plan. Therefore two questions relating the presence or absence of a

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strategic plan and a business plan were included in the questionnaire.The results show that the presence of a strategic plan does impact on the

adoption of HR practices. Strategic plans had a significant positive relation-ship with the great majority of the HR practices in table 1, but a negative rela-tionship with two recruitment, two selection practices, informal performanceappraisal and awards-based pay. The significance of this finding relates to thefact that only 66 percent of SMEs in this study had a strategic plan even though78 percent had a business plan. Although 92 percent said they had identifiedspecific goals and objectives as part of the strategic/business plan, only47 percent said they had altered practices in order to achieve the goals andobjectives identified in the strategic/business plan. This may suggest that SMEmanagers do not tend to take a strategic approach to HRM.

Unionisation and HR practices in SMEs .

.

The percentage of the workforce which managers estimated belonged to aunion was low in SMEs although there is a size effect. The presence of at leastone union member in the workplace has a significant effect on less than half(31 practices) of the 73 HR practices. In compensation, the absence of unionmembers was significant in a number of practices and, while there were someemployment relations practices for which unionisation was significant,substantially less than half of the respondent SMEs adopted those practices,with the exception of formal agreements with employees. The findings suggestthat unions play a role in relations between employees and employers in onlya minority of SMEs.

Overall, the results suggest that, despite half the SMEs (52%) in Australiahaving at least one union member according to managers’ estimates, tradeunions have little direct impact on SMEs. Union presence - measured bymeetings with union delegates, or shop stewards, whether formal (13%) orinformal (25%), and agreements with unions (27%) - indicate little interactionoccurred between SME managers and representatives of unions. The incidenceof formal agreements with employees did not suggest that SME managerswere collective in their relations with employees or that they are consultative.The evidence for SMEs as open organisations is weak, as joint employee-management consultative committees and work-teams are found in fewer thanhalf of SMEs. The evidence appears to favour a bleak house scenario forAustralian SMEs overall.

Conclusion

The ability to compete effectively in a constantly changing environment isviewed as the key to survival and growth for SMEs. This means being able to

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anticipate, respond and adapt to a changing environment (Bonvillian 1997;Decker and Belohlav 1997; Nadler and Shaw 1995). Nadler and Shaw (1995)and see organisational capability, defined as the skills, abilities and competen-cies of employees and managers, which are the unique product of the organ-isational system, as the fundamental source of sustainable advantage. Thechallenge for SME managers is to develop organisations which can achievesuch an advantage through recognition of the implications of a turbulent envi-ronment and creation of organisational systems that facilitate flexibility, innov-ation and speed (Dunphy and Stace 1992; Limerick 1992; Nadler and Shaw1995).

SMEs often face difficulties in planning and responding to the changingenvironment owing to their position in the marketplace in comparison to thatof large organisations. The impact of a turbulent environment on the viabilityof SMEs is demonstrated by the high exit rates reported by the business longi-tudinal study which revealed that one-quarter of small firms close or sellwithin three years. These pressures, together with the low uptake of partici-pative practices, which might improve employees’ contributions to theperformance of the firm, may mean that managers in Australian SMEs areignoring participative HR strategies which can contribute to effective compe-tition in the marketplace.

HR practices are only moderately represented in Australian SMEs. Takentogether with a low prevalence of participative HR practices, low levels ofunion membership, the low presence of specialist HR managers in SMEs andalmost half of the sample (44%) not having a strategic plan, a ’bright prospect’scenario is unlikely.

SME managers may not be aware of the links between these practices andorganisational performance, which Huselid (1995) and others have proposed.In a separate, unpublished study on the managerial assumptions of SMEmanagers, McDonald found that three-quarters rely on their own experienceas the primary source of their ideas managing their organisations. Even whenthey are aware of the advantages of these practices, they may still disregardthem (Johnson 2000). A second reason may be that SME managers do notalways view these practices as practical within the context of a managing asmall organisation. SMEs tend to be quite informal in their approach to HRmanagement (Johnson 2000) and there is some support for this in the resultsof this study. Third, the cost of implementing new practices is always an issuefor SMEs. Fourth, the absence of HR managers in SMEs will also have animpact on the uptake of HR practices (Wiesner and McDonald 2001).

A greater understanding of human resource practices may lessen the frus-tration that small business owners experience as the result of HR problems.Furthermore, this added understanding of current HR practices may also beuseful in solving the problem that many small business owners may not evenrecognise their own failure to deal with HR issues. In other words, regardlessof organisational size, the reliance upon traditional HR practices (which

49

according to the literature are less sophisticated than our study revealed) maycause an intensification of problems as firms expand.

Do Australian SMEs constitute an estate of bleak houses or houses witha bright prospect? While the neighbourhood clearly has individual establish-ments that are examples of both extremes, it is neither a slum nor an elitesuburb. The adoption by Australian SMEs of HR practices may be describedonly as moderate, and in this regard, the low application of participativepractices in the context of low unionisation and a low incidence of collectiverelations indicate that many SMEs need a make-over if they are to meet thedemands of the market.

Retha Wiesner is Associate Professor in human resource management at the Faculty of Business,

University of Southern Queensland and Jim McDonald is a Senior Lecturer in industrial relations in thesame faculty. After conducting a regional and national study, they are now co-ordinating a majorinternational study on human resource management practices and organisational change in SMEs.Countries such as Australia, New Zealand, the Netherlands, South Africa and Malaysia are currentlyincluded in the study.

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