HRM and Entrepreneurial firms

Managing Human Resource Management in Entrepreneurial Firms

Authors
Shafay Shahid
Student, Comsats institute of
information and technology
Salman Shaukat
Student, Comsats institute of
information and technology
Shahzeel Khan
Student, Comsats institute of
information and technology
Almas Muneer
Student, Comsats institute of
information and technology
Key words: human resource
management
(HRM),
entrepreneurial firms

Abstract
Entrepreneurial firms have limited opportunities,
limited resources, limited market and limited time. These
firms must use every means available to them for creating
competitive advantage. The purpose of this research paper
is to review the literature related to human resource
management (HRM) and entrepreneurial firms. This
research paper is also explains formalization of HRM
practice sin entrepreneurial firms. There is also the
overview of functions of human resource management in
an organization with perspective of small and large firms.
The market condition changes rapidly by which the
importance of HRM for entrepreneurial firms increases.
There is also a related case study which further helps to
understand the scenario at its best. The ultimate aim for this
research paper is to determine the past work in this field
and also to find out which area need more to explore.

Introduction
When we think about the management
abilities of an entrepreneurial firm there are
many questions which come to our mind.
Like how some small firms are more
successful than other? How some firms have
more life than others? What are the skills
required to keep an organization always on
profit side? What are the causes of failure?
There are need to find out the answers of
such questions which can help in
understanding human resource management
in small businesses.

Human resource management is traditionally

described as the systematic process of
acquiring, developing, rewarding and
maintaining an organizations people
resources so as to maximize performance.
(Butler, P.F. and Schuller, R.S., 2005)
An interface between an owner and the
firms employees is just due to the HRM.
There is increase in importance of HRM in
organizations. A firm would need employees
who are productive and would be committed
to give their 100% for organizational
success. If you have good employees in your
1

HRM and Entrepreneurial firms

organization then you can easily achieve
your goals. For the survival of firms, you
must have the ability to find out best
employees and to create a climate for their
performance could have a positive impact on
the survival of the firm (Kilmann, 1990).
Some successful owners have given credit to
their employees for their success (Hofer and
Sandberg, 1987). For the success of
organization the contribution made by
employees and human resource management
are clearly defined in classic study by
Foulkes(1980)
The success of entrepreneurial firms depend
upon their ability to create new and better
products and services and on their capacity
to move quickly as market opportunities
present themselves. Right people are
necessary to achieve and maintain these
potential advantages (Hayton, J.C. and
Kelley, D.J., 2006). The requirements for
human resource changes rapidly when
newly firm grow. Many successful
entrepreneurs struggle to create an effective
human resource function in their
organizations because they feel that people
are the real assets for the success of their
organizations. (Hayton, J.C., 2005).
Effective HRM practices are becoming
increasingly important in the modern
economy, now-a-days companies facing the
challenges of the need for trained employees
and skilled labor. These challenges, coupled
with the third trend toward smaller firms in
general, reinforce the need for effective
HRM practices in the small firm (Audretsch
and Thurik, 2000, 2001).
In general, there is confirmation by
empirical research that the use of formal HR
practices in smaller firms is less than in

larger firms (Barron et al., 1987; Hornsby

and Kuratko, 1990). For example, less use of
formalized recruitment practices in smaller
firms (Aldrich and Langton, 1997), training
programs for employees are less (Koch and
McGrath, 1996; Westhead and Storey, 1997,
1999) and performance appraisal methods
are also less formalized (Jackson et al.,
1989). In spite of the size effect, a growing
base of research evidence suggests that far
from being homogeneous, small firms
nevertheless vary widely in the professional
HRM practices in use (De Kok and Uhlaner,
2001). For example, Deshpande and Golhar
(1994) find HRM practices within many
small manufacturing firms to be as
sophisticated as those in larger companies.
In the same way, firms of all sizes use
usually informal recruitment and selection
methods, even it was found that small
businesss HR practices are often more
better than they expected (Hornsby and
Kuratko, 1990). Hill and Stewart (1999) also
demonstrate variation in
level
of
sophistication of HRM practices in smaller
organizations by using a small set of cases.
There is extensive literature on both HRM
and entrepreneurship, but literature on both
together is very rare. The studies on HRM in
entrepreneurial firms are very few in
number. To understand the organization of
entrepreneurial firms, HRM is very
important (Keating and Olivares, 2007). In
development of entrepreneurial firms, there
exists the importance of managing HRM in
firms. Now, on looking the importance of
HRM in entrepreneurial firms the researches
in this field begins (Heneman et al., 2000).
There are many researches in the past which
showed that many newly firms find it
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HRM and Entrepreneurial firms

difficult to use traditional approaches of
managing human resources. The reason is
that the traditional approaches of managing
human resources do not fulfill the unique
needs of start-up firms (Vandermerwe, S.
and Birley, S., 1997).
The purpose of this paper is to analyze the
past work related to HRM in entrepreneurial
firms. This will helps in determining how
much work has been done and which areas
are still to explore. The purpose is not
limited to assess the structure and
relationship between them, but also to find
out new ideas for future work. In this
research paper, we describe the importance
of human resource management in
entrepreneurial firms which will help to
newly formed businesses.
Next we covers the detail literature work
done in past on managing human resources
in smaller entrepreneurial firms. Then there
is a case-study related to this field. Then
conclusion and limitations which explain
what we concluded from our research and
what the limitations are. Then there is
appendix, which includes the definitions of
important terms.
Literature review
Human resource management (HRM)
The skills, abilities and knowledge of
employees are known as Human capital
(Hayton, 2005). The activities which are
related to the management of employees and
relationship with them is known as human
resource management (HRM) (Lin et al.,
2008).By aligning HRM policies and
practices, helps firm with the internal
capacity to change theirself according to
their environment of competition (De Saa
Perez and Garca Falcon, 2004; Kidwell

and Fish, 2007). There are many examples

of such policies and practices like selection,
staffing, training and reward systems with
business strategies (Leingnick-Hall and
Leingnick-Hall, 1988; Delery and Doty,
1996; Svelik and Starrov-Costea, 2007;
Petrescu and Simmons, 2008; VeranoTacoronte and Melian-Gonzalez, 2008).
The source of sustainable competitive
advantage is the ability of a firm to develop
such practices according to business strategy
(Dyer and Reeves, 1995; Huselid et al.,
1997; Barrett and Mayson, 2007; Andonova
and Zuleta, 2007). There are three
perspective of strategic HRM (Delery and
Doty, 1996; Twomey and Harris, 2000):
universalistic,
contingency
and
configurational. The universalistic (or best
practice) perspective look for those policies
which are more effective and gives gain in
result to all firms (Arthur, 1994; Huselid,
1995). There is the idea that some HRM
practices will helps in supporting a corporate
strategy by affecting behaviors and
outcomes are based on remaining two
perspective of strategic HRM. The best
source of achieving competitive advantage
is human resources because human
resources have the capability to transform
other inputs like money, machine and
material into output. The other resources are
easily copied by competitors like product
and method but human resources are unique.
According to Khatri (1999), flexibility and
adaptation to organization are provided by
people which are the most important factor.
There is one need to bear in mind that
people (manager), not the firm, are the
adaptive mechanism in determining how the
firm
will
respond
to
competitive
3

HRM and Entrepreneurial firms

environment (Rundle, 1997). Many scholars
have noted that to manage human resource
is more difficult than managing other
resources (Barney, 1991; Lado and Wilson,
1994). However those firms will definitely
have edge over others which learnt that how
to manage their human resources effectively
because it takes much longer time in
acquiring and positioning human resources
effectively much longer time (Wright et al.,
1994).
In areas like staff commitment, the
organizational behavior can be improved by
HRM in firms, which in turn leads to
improved staff performance (Koch and
McGrath, 1996). If the organization wants to
develop a sound HRM system, then
organization should have effective human
resources. HRM practices refer to
organizational
activities
directed
at
managing the pool of human resources and
ensuring that the resources are employed
towards the fulfillment of organizational
goals (Schuler & Jackson, 1987; Schuler &
MacMillan, 1984; Wright & Snell, 1991).
The policies and practices of HRM may
vary from business to business and from
country to country.
Entrepreneurship
With different perspective in academic
discipline, entrepreneurship is a difficult
concept to pin down. Entrepreneurship is
defined as the process of creating value by
using unique set of resources to exploit an
opportunity (Stevenson et al., 1989). In this
process, there is a set of activities which are
necessary to find out an opportunity,
develop the concept of business, manage the
resources, implement the concept and then
manage and harvest the venture (Morris and

Jones, 1993). Entrepreneur is the person

who performs this set of activities.
In literature, the concept of entrepreneur
first appears as individuals (Kirzner, 1973).
That is why the traditional and older studies
just focus on the characteristics and behavior
of the entrepreneur, but also analyzes the
creation of new organizations start-ups
(e.g. Gartner, 1985; Aldrich, 1990).
Entrepreneurship, however, is more than just
starting a new firm. It is a phenomenon on
firm level (Stevenson and Jarillo, 1990; Lim
et al., 2008). So, there are also studies on the
concept of corporate entrepreneurship.
These studies analyze entrepreneurial firms
which also display entrepreneurial behavior
(e.g. Zahra et al., 2000).
There are three basic component of
entrepreneurship: innovativeness, risk taking
and proactiveness (Covin and Slevin, 1989;
Zahra, 1993). Innovativeness is the looking
for creative, unusual or novel solutions to
problems and needs. These solutions may be
new technologies and processes, as well as
new products and services. The willingness
to compel significant resources to that
opportunity which has high chance of failure
in future is called risk taking. Such type of
risks can be easily observed and managed.
The implementation, with doing whatever is
necessary to bring an entrepreneurial
concept
to
fulfillment
is
called
proactiveness. These three concepts help in
the creation of new firms (start-ups) or
corporate entrepreneurship (in established
firms). Corporate entrepreneurship, for its
part, includes three dimensions: innovation,
venturing and strategic renewal activities
(Guth and Ginsberg, 1990).

HRM and Entrepreneurial firms

HRM and entrepreneurship
In todays business environment, n
entrepreneurial orientation is very critical
for the survival and growth of an
organization (Morris and Jones, 1993). The
current trend is toward industry which is
knowledge-intensive
means
that
competitiveness is highly depends on the
management of the relational bases of
members of organizations.
Now-a-days, the culture, attitudes and
commitment to rmployees are more
important than ever before for the success of
firms (Snell et al., 2002). The issues faced
by entrepreneurial firms can understand by
HRM theory and practices (Altinay et al.,
2008). The acquisition and deployment of
human resources in start-ups and highly
innovative ventures are the examples of this.
Other examples are the contribution of HRM
practices to the survival of new ventures,
and the impact of resource acquisition,
allocation and development on the speed and
direction of growth in rapidly expanding
firms (Heneman et al., 2000; Katz et al.,
2000; Barrett and Mayson, 2007). HRM is
the area which decisions highly affects
entrepreneurship (Kuratko et al., 2005).
Burgelman (1983) and Schuler (1986)
among others propose that a large number
of corporate entrepreneurship is highly
influenced by HR policies. There is an
argument by Schuler (1986) to improve
entrepreneurship there must be consistent
HR practices. Schuler and Jackson (1987)
gives the detail to the relationship between
each of the HRM policies planning,
staffing, appraising, compensating, training
and development, and labor-management
relations

and
entrepreneurship.

Characteristics of employees are associated

with successful entrepreneurial efforts like
risk-taking, creative, innovative, long-term
oriented, flexibility to change, co-operation,
tolerance of uncertainity and a preference to
assume responsibility (Schuler, 1986).
Both entrepreneurship and HRM, however,
have problems restricting their fields of
research. This is especially true for
entrepreneurship because of vagueness that
exists in the concept of entrepreneurship.
Historically, this is why entrepreneurship
researchers have studied founding processes,
entrepreneurs as individuals, and highgrowth firms. For their part, HRM scholars
have studied the management of employees,
analyzing both general and specific HRM
issues in large firms.
Researchers only study the HRM of
established companies by ignoring the
importance of HRM for new organizations
(Katz et al., 2000). Managers define HRM
as establishment, policies, procedures, and
paperwork. Moreover, human resource
researchers have traditionally obtained much
of their data from HRM departments. In
small and medium sized enterprises,
especially in start-ups, there is no proper HR
department, this creates a problem for
researchers trained in using traditional HRM
paradigms. In spite of this, though, in recent
years many studies on HRM in start-ups
have appeared (e.g. Quader, 2007).
At the end, there is a gap exists in literature
of both entrepreneurship and HRM, which
can be filled by studying the role of HRM in
entrepreneurial firms (Keating and Olivares,
2007). As there is very importance of HRM
in entrepreneurship, there is importance of
filling this gap. HRM plays a role in
5

HRM and Entrepreneurial firms

entrepreneurial firms as the shaker and
mover in firm development and growth, and
because the literature has simply not
researched this area in great enough depth.
HRM practices in small firms
Formal HRM practices
The definition of formalization is not
appears to be universally accepted. There
are different labels used for formalization in
the context of HRM practices. In our
research paper, the generally used labels for
formalization are formal (Heneman and
Berkley, 1999), sophisticated (Golhar and
Deshpande, 1997; Hornsby and Kuratko,
1990; Goss et al., 1994), or innovative
(MacDuffie, 1995). These labels are
generally referred to HRM practices that are
thought to stimulate competence and
commitment of employees. There are
different practices that are used like testing
of candidate, pay system, and increased
employee safety.
Formalization in small firms is low
The operations of small businesses are
informal and more flexible than larger firms.
there are various studies on entrepreneurship
which supports this general finding (Gibb,
1997; Hendrickson and Psarouthakis, 1998;
Lee, 1995; Marlow and Patton, 1993;
Pfeffer, 1994; Storey, 1994; Whittington,
1993). In HRM practices, these patterns of
informality tend to repeat themselves.
Empirical research confirms that in general,
smaller firms use less formal HRM practices
in their businesses (Barron et al., 1987;
Hornsby and Kuratko, 1990; Jackson et al.,
1989).
Heneman et al. (2000) did work on literature
of this topic among 28 different
publications. There are only 17 articles in

total 403 articles on HRM with small sized

businesses. The conclusion of their work is
that there is lack of information of HR in
SMEs which create problems for theory,
research and practices.
There are different definitions are used for
SMEs in past. SMEs in the Netherlands are
often defined as firms with 100 or less than
100 employees. For EU, Eurostat uses a
threshold of 250 employees, and in U.S the
small business administration (SBA) defines
firms with less than 500 employees
(Flanagan and Deshpande, 1996). In
empirical
studies,
these
definitional
differences are reflected. For example,
Hornsby and Kuratko (1990) investigate
firms with 1-150 employees. Within that
sample, differences between smaller and
larger firms are identified. Jackson et al.
(1989) define small firms as those with less
than 250 employees, and Golhar and
Deshpande (1997) use a size class boundary
of 500 employees. Barron et al., 1987
mentioned firm size effect but present no
information on the size of organizations
within his sample.
Apart from these limitations, we concluded
that in smaller firms there is lee use of
formal HR practices, but a substantial
amount of unexplained variation still
remains across small firms (De Kok and
Uhlaner, 2001). Many scholars tried to
explain the reason behind these informal
patterns. They argued that informality is
more suitable for smaller firms. For
instance, Hill and Stewart (1999) suggest
that to cope up with environmental
uncertainty, smaller firms should be more
flexible and informal. The lack of resources

HRM and Entrepreneurial firms

also leads to less use of formal practices in
small businesses (Hendry et al., 1991).
The role of HRM department in the
formalization of HRM practices
There is indirect relationship between firm
size and formalization of HRM practices
(Hendry and Pettigrew, 1992). In their
model of strategic change and human
resource management, they explained the
difference between HRM context and HRM
content. The HRM context includes its,
definition, role, organization and outputs. In
it, there is the presence of proper HRM
department or HRM manager. The content
of HRM includes work systems, labor flows,
reward systems and employee relations. The
formalization of HRM practices can be
considered as a characteristic of HRM
content.
According to this model, organizational
context influences HRM context, which in
turn - partly - determines HRM content.
Applied to the current study, organizational
characteristics may influence the presence of
an HRM department or HRM manager,
which in turn determines the formalization
of HRM practices. In SMEs there is not
specific HRM department and HRM
manager (Hornsby and Kuratko, 1990;
Atkinson and Meager, 1994). In accordance
to this, there is finding that smaller firms
have more informal HRM practices than
larger businesses.
Attitudes of Owner-Managers of Small
Firms to HR Practices
The attitude of owner of small business
towards HRM practices is very critical issue
in this debate. Deshpande and Golhar
(1994), reviewing earlier American research,
reaffirm that if the owner-managers of small

firms have not benefited from training in

formal personnel management practices,
they will not consider HRM practices to be
critical to improvements in business
performance. However, caution should be
exercised when reviewing statements of
attitude. Deshpande and Golhar (1994)
stress that what is perceived as important
by managers may not actually be practiced
by them. Moreover, the Leicestershire
study also found some discrepancy
between the claim to have an integrated
approach and the reality. Much has been
written about the gap between rhetoric and
reality - for example, Legge (1995), Sisson
(1994) and, perhaps most persuasively,
Thompson and O'Connell Davidson (1995).
The identification of such a gap clearly
requires research which attempts to match
statements of belief with the practices
observed and recorded within organizations.
A key factor in the formulation of small
business employer attitudes towards the
broader issue of employment relations might
be the extent to which such employers are
dependent on the co-operation and trust of
their employees. Making this assertion,
Scase (1994) notes that democracy rather
than autocracy are more likely to
characterize the nature of employment
relations within small firms because mutual
dependency is central to the relationship.
Small firms versus large firms
Smaller and large firms are different from
each other in many ways like resources,
money and time. But still all types of
businesses must hire employees to run their
regular activities. HR practices are different
for smaller firms than larger firms because
of difference in the requirements of both
7

HRM and Entrepreneurial firms

firms and also small businesses owners are
less able to understand the (Deshpande and
Golhar, 1994). Employees are an important
assets for both small and large firms.
Following HRM functional areas are
addressed and compared in perspective of
both small and large firms.
Employment, recruitment and placement
Employment, recruitment and placement are
a part of HRM. In many situations, because
of the availability of only few employees,
the small business owners handles HRM
function himself or herself (Hornsby and
Kuratko, 1990). Because of the single
authority of the owners, it is easier for them
to make organizational and hiring decisions.
While in large firms these tasks are
performed by HRM department.
Deciding
which
positions
of
the
organization are to be filled to achieve the
organizational goal comes under the head of
employment. The employment process starts
with the identification of which position is
to be filled, then the process of recruitment
is done and then finally the hiring of the best
suitable employee is made (Cain and
Kleiner, 2002).
Recruitment involves selecting qualified
applicants from different sources. In small
organizations, it may fall on owner to
recruit. While in large organizations, this is
done by HRM department. A small business
has fewer resources as compared to large
business in recruiting employees. It is
important element for business success to
attract the most qualified applicants but the
placement process is critical element. Both
use some of the same techniques. In the case
of small companies, if a small hire is done
wrong this can cost a lot to the company and

also the work will have to be done

again(Walsh and Carrison, 2002).
The process of placement starts with the
overview of resume an ends with
theselection of a suitable individual to fill
the vacant space in the organization. Firstly,
match it with job description and
specification. If there is a match, then an
interview may be called. After that the
background information is conducted and
verified.Many small businesses do not
actively pursue checks and reference check
like large businesses due to time and
resource issues. Then comes testing which is
done in small businesses by performance
tests (Worthington and Worthington, 1987).
Large companies tend to use more
sophisticated methods.
Training and development
Training and development should be
provided by every company. Training
involves preparing an employee and
development is the continuous training.
Why training and development? As
employees is the most valuable asset. The
better way to increase this asset is by
investment in training. It is important to stay
ahead in innovation so the investment made
in training employees strengthens the firms
innovative capabilities (Gundry, 1991).
There are not large training budgets in small
businesses like many large firms. The most
serious challenges are restrictions on time,
money, space and staff (Cohen, 1998).
In contrast to smaller businesses large
organizations have enough time, space, staff
and money to train employees. Large firms
use training specialists for their training
objectives, developing and presenting
training materials, and to check the progress
8

HRM and Entrepreneurial firms

to ensure that the training objective have
been achieved. Organization trainers train
employees by using on-the-job training,
step-by-step training, books, videos,
lectures, classes, simulated training, and
computer-based training. The research
shows that the large businesses provide
more variety in training method. Bishop
found that new employees received far more
hours of both formal and informal training
in establishments with more than 500
workers than in smaller workplaces (Brown,
Hamilton, and Medoff, 1990).
Compensation and Benefits
The form of pay or incentive given to an
employee is known as compensation.
Benefits are additional rewards that can use
by employer to attract employee. On the
basis on skills, knowledge, experience, and
education employee can be compensated.
All firms, small and large, should have
performance appraisal system and a wage
and
salary
administration
program
(Rotundo, 2003; Arthur 1987). A wage and
salary administration program is composed
of a salary structure according to an
employees pay grade that is based on job
descriptions, position evaluations, and salary
surveys. Because of the change in economic
condition this program changes annually. To
evaluate
employee
performance,
performance appraisal system is used. Due
to financial and working conditions there are
differences in compensation among small
and large firms. According to Amba68 Rao
and Pendses investigation, a small business
compensation and maintenance practice
lacks a systematic and rational approach
(Deshpande and Golhar, 1994). They

typically do not have the monetary funds to

hire employees with exceptional working
skills, training, experience, and education.
Thus, by competing with large businesses
that may be capable and willing to pay
higher wages for employees is challenging.
As a result, workers in large firms have
more work experience and knowledge than
those in small firms (Dupray, 2001; Brown,
Hamilton, and Medoff, 1990).
In general, large firms are willing to pay
employees more due to organizational
working conditions such as the work
schedule and environment. A large business
depicts the image of long working hours,
corporate
appearance,
rules,
close
supervision, less decision-making, and an
impersonal and formal atmosphere (Brown,
Hamilton, and Medoff, 1990). In contrast,
the small firms depict relaxed and informal
environment where employees have the
opportunity to make decision and take
responsibility (Dundon, Grugulis, and
Wilkinson, 1999).
Employee and Labor Relations
Employee relations refer to employeeemployer interaction in non-unionized
settings. On the other hand, labor relations
refer to employee-employer interaction in
unionized settings. It is highly depend on the
setting of organization.
There is need for cooperation between
employers and employees for the success of
organization. Both non-unionized and
unionized environments must emphasize
communication, disciplinary action, and
conflict and dispute resolutions to achieve
harmony in the workplace.
Is
small
business
Employee
and
owner/manager relation is informal and
9

HRM and Entrepreneurial firms

having the friendly environment (Dundon,
Grugulis, and Wilkinson, 1999). One-on-one
and face-to-face communication takes place
that leads to increased cooperation and less
formal policies.
In smaller firms, owner or the manager
made the disciplinary decisions. There is no
need for conflict and dispute resolution in
small firms because owner or the manager
handles the problem itself. However, there
may be some instances in which alternate
dispute resolutions (ADRs) are used. ADR
is mainly used when employees observe
unfair treatment or violation of their rights
in their termination (Roberds, 1991). ADRs
include mediation, arbitration, negotiation,
private judging and other techniques that
keep cases from going to court.
Occupational Safety, Health, and Security
Occupation safety, health and security are
address by every firm, whether small or
large. Occupational safety refers to having
safe equipment and tools, working in a nondangerous facility and work environment.
Occupational
health
concerns
the
employees well-being and state of mind.
Security at work ensures that the employee
having a safe workplace in a nonthreatening environment.
Safety on job is important for all
organizations. There may be injury or death
due to unsafe working conditions which
leads to serious problem for organizations.
Small businesses may be short on resources
and safety knowledge, but they may reap the
benefits of safety just as large businesses
(Minter, 2002).
There are many ways to reduce injuries and
unsafe working conditions. Employers may
also utilize incentives such as bonuses, t-

shirts, and free lunches as rewards to reduce

injuries and unsafe working conditions.
For organizations success all employers
should provide safe workplace for the safety
and satisfaction of their employees. So that
the employees feel safe and comfortable at
work . Zero-tolerance policies for breaches
of security, training, violent acts, and a
security policy are techniques that help
employees and employers to deal with
workplace security.
HRM inside small and entrepreneurial
firms
HRM plays a very important role in an
organization. Most of the HRM literature
and
theories
have
focused
large
organizations and small organizations (B. E.
Becker & Huselid, 1998; Huselid, 1995;
S.jackson & Schuler, 1995; Lado & Wilson,
1994). According to Tansky & Heneman
(2003) the HRM researchers have given
SMEs the status of second-class citizens.
Another qualitative data shows that out of
403 articles only 129 have addressed the
HRM problems and issues of small firms
(Tansky & Heneman, 2003).
HRM is an important part of both large and
small firms. HRM have a vital effect on the
overall performance of the organization. It
has been proven that effective human
resource HR practices has helped in the
improvement of the organization and also
provided organizations with a competitive
advantage (see Becker and Gerhart, 1996).
The HR activities and outcomes of small
firms should be more focused and analyzed
and the necessary information gathered as a
result should be provided to the people who
are a part of those organizations (see Becker
and Gerhart, 1996).
10

HRM and Entrepreneurial firms

How can we define a small firm? According
to de Kok and Uhlaner (2001) a business
with 50 or fewer employees is a small firm.
Way (2002) was of the view that 100 or
fewer employees will make a small firm.
Hornsby and Kuratko (1990) suggested 150
employees or fewer and Flannagan and
Deshpande (1996) said that 500 or less
employees will constitute a small firm.
But, defining "small" as 500 or fewer
employees could result in as much variance
in HR practices within the sample of small
organizations as between large and small.
Wager and Ross (1998) noted that in the
presence of an HR expert in an organization
the tendency for firms to have more
effective HR practices increases as their size
increases. (Koch and McGrath, 1996)
identified that small firms are much less
structured and engage themselves very less
in HR practices and sophistication. A survey
of 117 randomly selected SMEs showed that
only 15 (12%) of them had a proper and
structured HR department (Heneman and
Berkley, 1999, cited in de Kok and Uhlaner,
2001).
The most commonly found HRM practices
in small firms are reluctant to the
operational needs and pragmatic concerns
like record keeping; staffing activities, such
as recruiting and selecting staff; and, to a
lesser extent, motivation and retention
activities such as compensation and reward
practices (Deshpande and Golhar, 1994;
Duberley and Walley, 1995; Heneman and
Berkely, 1999; Hornsby and Kuratko, 2003;
Kotey and Sheridan, 2001; McEvoy, 1984).
A bulk of studies indicate that small firms
undergo informal HRM practices (see for
example Benmore and Palmer, 1996;

Heneman and Berkely, 1999; Hornsby and

Kuratko, 1990; Kotey and Slade, 2005;
Marlow, 2000; Marlow and Patton, 1993;
Nguyen and Bryant, 2004; McEvoy, 1984;
Ram, 1999). Some say that small firms have
more than expected sophistication in HRM
practices (see for example de Kok and
Uhlaner, 2001; Duberley and Walley, 1995)
Hornsby and Kuratko (2003). An extension
of their 1990s studies concluded that HRM
practices in smaller ventures (firms with less
than 150 employees) have stagnated or even
regressed over the last decade despite threats
within the regulatory and external
environments of small firms that should see
a greater emphasis on HRM in small firms.
Many explanations and suggestions have
been proposed to identify this informality of
structured HRM practices and it has been
identified that HRM is not a priority of small
businesses (Wilkinson 1999: 209). Because
of the shortage of resources like time,
money, people and expertise it is observed
that typical SMEs managers focus is
usually on other issues like in finance,
marketing and production ignoring HR
practices (McEvoy 1984). Additionally, the
infrequency with which critical HR-type
decisions are required in firms with a small
headcount at least, according to the firms
owner(s) or manager(s) can obviate the
need for considered attention to these
matters, further limiting small firms
exposure to
formal
HR
practices
(Nooteboom, 1993). Models showing the
typical life-cycles of small firms (Greiner,
1998; Churchill and Lewis, 1983) show how
in the start-up phase the managers control
and interact with all of the employees
directly, ignoring the need for a more
11

HRM and Entrepreneurial firms

structured structure But with time, as the
business grows, the task of management is
rendered more and more complex and hence
the need for a well formalized structure (i.e.;
HRM) is realized. This well established
structure will then be helpful to meet the
demands of larger workforce and the
activities would be coordinated more
effectively. Some companies, however, still
resist the implementation of formalization.
According to Hornsby and Kuratko (2003,
Staffing and reward practices are important
HRM issues to be considered by small firms
and more work should be done. The
literature on strategic HRM, while more
commonly associated with the study of large
firms, may contribute to a deeper
understanding of the role of HRM in small
firms.). A view of different firms suggested
that HRM can be a source of competitive
advantage for the firms (Barney 1991). They
argue that a firms ability to develop unique
bundles of inter-linked HRM practices
along with business strategy is a source of
sustainable competitive advantage (Boxall,
1996; Delaney and Huselid, 1996; Dyer and
Reeves, 1995; Huselid et al., 1997; Lado and
Wilson, 1994).
In small firms, which are growth oriented to
cope with the increasing complexity with the
increasing number of employees HRM
practices and policies are necessary to be
implemented (Arthur, 1995). Despite this,
small firms show poor HRM practices in
recruitment
and
selection
processes
recruitment and selection. A study of
McEvoys (1984) including 84 small
businesses with an average of 75 employees,
identified that employers had difficulty
finding competent and suitable employees
their practices of recruitment were
unimaginative
and
their
selection
techniques and procedures were limited to

application forms and face to face

interviews. Marlow and Patton (1993)
suggested that employers of small firm
consider these to be useful and effective
practices to ensure that employees fit in the
job satisfactorily. Some are of the view that
the practices like face to face interviews,
reference checks, job try outs and
application blanks are for the purpose of
ease and convenience (see also Deshpande
and Golhar, 1994; Gilbert and Jones, 2000;
Kotey and Sheridan, 2001; McEvoy, 1984).
However, with a growth in small firms,
managers exhaust their informal staffing
contacts (for example, family members,
referrals and walk ins) and to sustain growth
they need more formal and structured
methods of recruitment (Williamson, 2000).
From outside the firm, SMEs face greater
levels of environmental uncertainty, and so
informality, reactivity and short-termism
may simply be borne of necessity (de Kok
and Uhlaner, 2001). At the same time, as
compared to the larger firms to adopt to
certain HR practices by HR managers SMEs
face les pressure. SMEs tend to avid both
advisory or coercive networks (see
Bacon and Hoque, 2005), including the likes
of employers associations in the former
case and trade unions in the latter, and nor is
employment
legislation
applied
as
stringently to SMEs (Marlow, 2002).
However, market pressures tend to bear
down harder on resource-poor small
businesses (Ram and Edwards, 2003).
In comparison to larger firms, implementing
HRM is costly in terms of time and money
for small firms (McEvoy, 1984; Reid et al.,
2002). Their idiosyncratic needs mean that
they are unable to achieve economies of
12

HRM and Entrepreneurial firms

scale and they rarely have the managerial
resources and expertise in the area (Chandler
and McEvoy, 2000; Hornsby and Kuratko,
1990; Klaas et al., 2000; Kotey and
Sheridan, 2001; McEvoy, 1984; McLarty,
1999). Small firms typically do not have a
designated HRM (or employment) specialist
and access to specialist HRM advice is
costly (Gilbert and Jones, 2000; Kotey and
Sheridan, 2001). Research (for example,
Hornsby and Kuratko, 2003; Marlow, 2000)
suggests there is considerable scope for
appropriately skilled external advisors to
help small business with HRM matters, and
the literature suggests that small business
operators tend to turn to those they trust for
this: usually their accountant or lawyer
(Harris, 2000; Jay and Schaper, 2003).
While advice can be expensive, it can also
be an investment against the cost of HRM
recruitment and selection mistakes or
defending an unfair dismissal case for
example, which may arise from poor HRM
practices and policies (Heneman et al.,
2000). However, using an accountant for
HRM assistance or advice can be
problematic as the primary role for
accountants is to provide financial and
accounting services and, perhaps, advice on
regulatory and reporting requirements, but
not specialist HRM advice (see Harris,
2000).
So while the formalization of HRM policies
becomes desirable as firms grow, the ability
for this to occur in small firms depends on
the recognition of the owner/manager of the
need for delegation and then the possibility
of delegating that task. Further the
formalization of HRM is also dependent on
the awareness of legislation and legal

requirements on HRM and employment

matters (for example, unfair dismissal,
occupational health and safety, equal
employment
opportunity
etc.)
and
recognition of the impact on their business
should they not comply. The implementation
of formal HRM practices is an important
contributor to small business success but as
Heneman and Berkley (1999, p. 53) indicate
the liability of smallness presents unique
challenges for HRM in small firms (see also
Deshpande and Golhar, 1994; Klaas et al.,
2000).
Case Study
Why do 53% of Small Businesses fail?

Success rate for small businesses is always

low. There are many reasons behind the
failure of small businesses. One of the major
problems is poor management of personnel.
Small businesses have not enough resources
to make a separate HR department. In small
businesses, everything is working under the
owner/manager. The owner/manager has all
the power related to HR policies and
practices.
The Financial Times has recently reported
that the number of new businesses being
13

HRM and Entrepreneurial firms

registered in the UK is surprisingly on the
increase. An average of 47,500 small
businesses have set up new bank accounts
each month of this year so far compared to
an average of 43,800 in 2008. Presumably
these statistics are being fuelled by the
recession, as more people create the jobs and
work they want and need by starting up a
business themselves.
Sadly, over half of these businesses (53%)
will
fail
within
five
years.
An illuminating article in Management
Today firmly attributes such failures to the
oversight of small businesses in addressing
the excess of small and tricky people issues
that are essential for the success of a
commercial venture.
According to Management Today:
Obviously in one-man-hands and very small
businesses you can resolve these issues
easily through common sense conversations,
and taking individual views into account
when making key decisions. At the other
end of the scale, larger businesses of
anything more than 100 people require HR
professionals who create policies by which
decisions are made. Its more impersonal
and people grumble, but they usually accept
that the policies were created for the
common good of the business, even if they
dont always agree with the outcomes. Its
the small to medium-sized businesses that
feel the crunch: they're torn between
accommodating everyones views, and
trying to reach decisions that are right for
the business and the individuals - all of
whom of course you know personally almost
as friends.
The small, everyday issues that quickly
become so difficult are things like policies

for extended leave, vacations, more flexible

working arrangements, status needs (job
titles!) and personal behavior. In managing
the people stuff in small-sized businesses,
we have to walk a tightrope between
impersonal policy and personal preferences,
between consultation and leadership, and
between the business and individual needs.

In a small business where there is no

specific individual responsible for
HR issues, who should be
accountable for people issues?
Does it make sense for small
businesses to outsource certain
aspects of HR? If so, which aspects?
Do even small businesses need
formal HR policies?
If
you
are
starting
your
entrepreneurial firm, then how could
you manage your human resources?

Conclusion and limitations:

This research paper helps in understanding
the nature and role of HRM in
entrepreneurial firms. There is increase in
interest to study this combined area of HRM
and entrepreneurship since 2000. Managing
HRM in entrepreneurial firm is vital to gain
success in business. Now-a-days, there is
increase in number of entrepreneurs in
market. Importance of HRM for any sized
company can be understood by this paper.
The formalization of HR practices in small
firms is explained in this paper. There is
more formal HR practices in large firms.
The reason behind this may be due to
unmeasured differences in the degree of
centralization,
standardization
and
specialization between small and large
firms. As small organizations have limited
14

HRM and Entrepreneurial firms

resources, they develop and implement
policies and practices differently than large
firms. In order to be effective and efficient,
the basic HRM functions must be performed
by both small and large firms.
Different explanations are given from
previous literature to understand the
scenario. But still there is more need to do
work in this field. There is need of wider
and deeper analysis of the role of HRM in
start-ups and in start-up performance which
would be useful in future. In addition, many
research papers are on just showing the
relationship
between
HRM
and
entrepreneurial firms. There is need to
define effective methods to use HRM
practices in start-up firms.
The field of HRM in small businesses has
been ignorant in both perspectives:
practically and theoretically. In this paper,
we are trying to address this issue by
discussing its importance in general. From
this analysis, we can draw some
implications for small business owners as
well as academicians. The most important
practical implication of this research is that
It showed the importance of HRM in small
firms so it the entrepreneurs of small firms
to implement the HRM in their firms. HRM
practices can be implemented by
outsourcing the activities to some HRM
consulting firms or by hiring a professional

Further to this, no works exist on the

combined and individual effects of HRM
practices on entrepreneurship or its results.
Studies that analyze whether a combined
package of human resource practices has a
differential impact on entrepreneurship than
the sum of the impacts of the individual
practices would be welcome.
There are many limitations which we faced
during literature. The inter-relationships
between managers and employees are
necessary because they represent essential
channels for the flow of knowledge and
information, which are the building blocks
of
innovation
and
entrepreneurial
opportunities.
HR manager. Hay and Ross (1989) also
suggested that for an owner and a firm to
succeed, help and information are needed
from experts. According to their research,
those who can best obtain this help also tend
to achieve most success.
The most important academic implication of
this study is that this research paper provides
the basis to researcher for future study in the
area of HRM for small businesses especially
in the context of developing countries like
Pakistan. Future studies on the basis of this
paper might also increase the HRM
literature with respect to small businesses.

Appendix
Human resource management:
The policies and procedures in which the human resource aspects of an organization are
carried out, including recruiting, screening, training, rewarding, and appraising.
Strategic human resource management:

15

HRM and Entrepreneurial firms

The process of formalizing and executing HR practices and procedures that could produce
competent employees which in turn will help organization to achieve its strategic goals.
Competitive advantage:
Any unique factor of a company that can help it to increase its market share and to compete with
their competitors.
Entrepreneurship:
Entrepreneurship is an art of bringing innovations and introducing new things and converting
those innovations into economic goods.
Entrepreneurs:
People who bring innovations and introduce new things to the society.
Environmental uncertainty:
A situation in which the external environment is unpredictable and the management have very
little information about that.
Recruitment:
The process of identifying, selecting and hiring the best suitable and best qualified persons for a
specific job.
Training and development:
The process of training and development is associated with the bettering of the performance of
overall organization at individual as well as group level.
Compensation and benefit:
Any kind of incentive or any additional reward given to an employee.
Performance appraisal method:
A procedure that helps to evaluate the performance of an employee.
Employee relation:
The relation between employees with its employer in a non-unionized organizational setting.
Labor relation:
The relation of employer with its employees in a unionized setting of the organization.

16

HRM and Entrepreneurial firms

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