Human resources management policies and practices in Kazakhstan: monograph 9786010405196

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AL-FARABI KAZAKH NATIONAL UNIVERSITY

S. N. Dossova B. K. Kambarov

HUMAN RESOURCES MANAGEMENT POLICIES AND PRACTICES IN KAZAKHSTAN

Almaty «Kazakh university Press» 2014 1

UDK 323/324(574) BBK 66.3(5 Каз) D 75 Recommended by Oriental studies school academic board, EPB and al-Farabi Kazakh National University RAMB humanitarian and natural scientific specialities academic-methodical section Reviewers: Doctor of economy science, professor Tattibekov B.T. Candidate of economy science, associate professor Kurassova A.M.

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Dossova S.N., Kambarov B.K. Human resources management policies and practices in Kazakhstan: monograph / authors: – Almaty: Kazakh university Press, 2014. – 226 p. ISBN 978-601-04-0519-6 Theoretical contribution of this research is the examination of the influence of a combination of KTG HRM practices, as opposed to studying the influence of individual HRM practices or a combination of some selective HRM practices, as has been the case in most of the prior studies. This research aimed to be more inclusive and extensive in terms of both sample size and issues raised. The study explores the way managers are thinking about contemporary HRM issues, concerns, and practices, and their plans for development for the future, in the context of the oil and gas industry in Kazakhstan. It provides insight which should be helpful for employers, enabling them to compare their perspectives and opinions with the aggregated data and literature presented in this study. Hopefully, it will encourage them to consider more strategically and systematically the things they can do to more effectively position their HRM efforts. Devoted to master and PhD students, studying “Management”, “Human resources management”, “Strategic management”, “Organizational behavior” and managers.

UDK 338.2:331.101.262:622.276/.279 (579) BBK © Dossova S.N., Kambarov B.K., 2014 © Al-Farabi KazNU, 2014

ISBN 978-601-04-0519-6

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CONTENTS NORMATIVE REFERENCES ................................................. 6 NOTES AND ABBREVIATION ............................................... 6 INTRODUCTION ..................................................................... 7 1. THEORETICAL AND METHODICAL BASIS OF HUMAN RESOURCES MANAGEMENT PRACTICES ........................ 12 1.1. Sustained competitive advantage, Human Resources and Human Resources practices theories ................................................... 12 1.2. Evolution of Human Resources management versus personnel management theories .......................................................... 24 1.3. The concept of HRM practices .............................................. 39 1.4. Training and organizational effectiveness .............................. 56 1.5. Strategic Human Resource Management concept ................... 67 2. HUMAN RESOURCES MANAGEMENT PRACTICES IN OIL AND GAS INDUSTRY OF KAZAKHSTAN .................... 82 2.1. Socio-economic background of Joint-Stock Company “KazTransGas” .................................................................. 82 2.2. Human Resources Policy of JSC KTG ................................... 92 2.3. Stakeholder Approach of the Corporate Social Responsibility Policy of NC “KazMunayGas” ................................... 107 3. ANALYSES OF JSC KTG HUMAN RESOURCES MANAGEMENT PRACTICES AND POLICIES .................... 124 3.1. The relationship between NC KTG Human Resources Management Practices, Human Resources Management Strategy and firm Corporate Strategy ............................ 124 3.2. Role of Human Resources Management Practices in creating employees’ job satisfaction and organizational commitment. ...................................................................................... 141 3.3. Training Design Interventions and Implications for the Productivity Effectiveness ....................................................... 155

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4. BASIC DIRECTIONS OF HRM POLICIES AND PRACTICIES DEVELOPMENT ..................................... 176 4.1. Conceptual basis of HRM practices improvement ................ 176 4.2. Methodical recommendations of integrated HRM practices Development ............................................................ 181 4.3. Practical recommendations for JS KTG HRM practices Improvement .................................................................................... 188 CONCLUSION .......................................................................... 210 LIST OF REFERENCES ........................................................... 214

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NORMATIVE REFERENCES In this study the following normative references were used: ГОСТ 7.1-2003 − Bibliographic records. Bibliographic description. General requirements and rules of compilation. ГОСТ 7.32-2001 − Scientific research paper report. Structure and rules of preparation. NOTES AND ABBREVIATION RK – Republic of Kazakhstan HR – human resources HRM – human resources management HR practice – human resources practice SHRM – strategic human resources management JSC KTG – joint stock company KazTransGas JS NC KMG – joint stock national company KazMunayGas CIS − Commonwealth of Independent States RBV − Resources Based View SCA − Sustained competitive advantage SKAs −, skills, knowledge and abilities ILO – international labor organization TNA − Training needs assessment OTP − Organization-Task-Person PA – performance appraisal CSR − corporate social responsibility MT – management team LTSI − Learning Transfer System Inventory OC – organizational commitment JS – job satisfaction PE – person environment PO – person organization PJ – person job KSAs − knowledge, skills, and abilities

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INTRODUCTION

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n today's dynamic and uncertain market environments, there is an increasing need for organizations to develop a sustainable competitive advantage to cope with change in order to secure long term success. In his address, the President of RK N.A. Nazarbaev has mentioned: “We need to design and implement an integral strategy which will secure sustainable competitiveness of our economy” [1, p.5]. Organization's systems, structures, resources and processes can be used to support achieving and maintaining a competitive advantage. Moreover, to achieve long term success, N.A. Nazarbaev has suggested that: “strategy should be based on specific competitive advantages of particular sectors and industries of our economy and take into consideration the world development trends and the state of international markets” [1, p.5].Kazakhstan shares issues with other republics in the Commonwealth of Independent States (CIS). Competitive advantages that bode well for its successful development include abundant oil reserves, a developing legal system, and socioeconomic reforms. However, the Republic has serious problems of economy modernization and diversification. Kazakhstan faces many challenges, but it has abundant natural resources, an educated population, and preliminary evidence indicates that new generations of citizens are quickly adapting to a new market psychology. The transformation of Kazakhstan to a market economy still faces many problems. Two of the most pressing problems are the creation of a more reliable labor market and developing a new standard of human resource management. The main task for the national companies has been identified by the President of RK: “the main tasks of all state holdings, including national companies they incorporate and other organizations, is to put the activity on a systematic approach through international practice of corporate management, accountability and transparency”[1, p.17]. Models for managing people have a long tradition in the West, and the majority of the models used in management research have U.S.A. ties or origins. However, Hofstede and Ardichvili are among those cautioning against the adoption of 7

ethnocentric management models into other cultures [1a]. Nevertheless, Western models of economic development and human resource management can be starting points for understanding what is happening in Kazakhstan. Based on the human resource management experience of the United States and other Western countries, we can appreciate the complexity of creating an HRM system that meets the needs of the new economy and the changing workforce in Kazakhstan. A management system is dependent not only on economic reform but also on the psychological transformation of employers and employees in the country. The true difficulty of changing an economic system or a way of managing is the difficulty of changing the mental models people hold about the roles of the worker, the enterprise, and the government. With the increasing importance of the “human factor” in modern organizations, Human Resources (HR) issues have become more salient to organizations that believe that people are their most important asset in achieving organizational goals. “Practically all successful modern states actively integrated in the world economic system have relied on a “smart economy”. And for its formation it is necessary, first of all, to develop one’s own human capital” [1, p.8]. Oil and Gas industry of Kazakhstan has long been regarded as a symbol of national strength. Since the Oil and Gas industry is closely related to economic stability and national development, it can be considered as a national strategic industry of Kazakhstan. But, a modern state of the industry demonstrates several complex issues related with modernization and diversification. Furthermore, lack of local professionals in this industry push us to investigate HRM systems of a national companies. According to N.A.Nazarbaev: “the Ministry of Energy and Mineral Resources should create and implement programs to modernize and re-equip oil and gas enterprises, create new petrochemical industries. We should develop production with added value, accompanying and adjoining industries for the oil and gas sector. It is necessary for the Government to staff this Ministry with modern personnel professionally capable of solving the most serious issues in the energy area, the main industry of our national economy at this stage” [1, p.18]. The managerial relevance of this research lies in providing JSC KTG HR department with information about how to configure the HR system and to link this system with the context in order to increase 8

performance. The results of this study can lead to recommendations about what factors are important for achieving employees’ job satisfaction and commitment. Thus, investigation of existing HRM practices in Oil and Gas industry organizations of Kazakhstan, and how these practice influence employee’s job satisfaction and organizational commitment, development of practical recommendations of HR practices improvement is important and timely research topic. Human resources management theoretical and practical issues were the subject of considerable Kazakhstani and foreign scholars’ researches. Despite the growing interest in SHRM by management scholars, SHRM as a theoretical concept is still in its relative infancy. While suggestions have been made that adopting an organizational perspective might help to effectively advance theory and research in SHRM, there has been little attempt to provide a critical evaluation and integration of such work. One serious inadequacy of the field is the lack of a strong theoretical basis for viewing the HRM practices within the larger organization. This inadequacy extends to the area of SHRM. Perhaps it is not too surprising given the theoretical linkages with the ambiguous nature of the concept business strategy. Following these considerations, three main research gaps emerge in the literature. First, considering the lack of consensus on the definition of SHRM, there is a need for greater clarity in the domain and operationalization of the concept. Second, consideration to adapt theoretical approaches in accordance with nowadays economic situation or design new theoretical approaches to the problem of human resources management strategies answering to up-to-date realities. Third, considering the lack of a strong theoretical basis for viewing the HRM practices it is very important that the researches develop theoretical models that allow for both understanding and predicting the effects of HR practices on organizational outcomes. The objective of this monograph is to address these gaps in the literature and, thus, advance research on HR practices and SHRM in the context of Oil and Gas industry of Kazakhstan. Thus, the relevance of this research is determined by Kazakhstan Oil and Gas industry human resources practices theoretical and practical issues development need. Having established the way human resources are managed as a critical 9

viability factor, this research evaluates the degree to which the main human resources management practices, implemented by Kazakhstan’s firm, conform to the paradigms proposed in the literature. For this purpose, we have designed a survey which was answered by a representative sample of employees working in KazTransGas Company. The results can thus be easily extrapolated to the oil and gas industry as a whole. This methodology was complemented with and cross-validated by additional data of a more qualitative nature. These include, among others, case studies, expert interviews and document analysis. The methodology used in this research was qualitative, investigating perceptions of contemporary human resource management in the oil and gas industry. A qualitative approach is appropriate for an exploratory and descriptive study. In-depth interviews were the major technique used in this research. Ten interview questions were designed to address the research questions. All participants were asked the same questions in the same order and in the same manner. Theoretical contribution of this research is the examination of the influence of a combination of KTG HRM practices, as opposed to studying the influence of individual HRM practices or a combination of some selective HRM practices, as has been the case in most of the prior studies. As indicated earlier, research on this topic in Kazakhstan has been limited to date. This research aimed to be more inclusive and extensive in terms of both sample size and issues raised. The study explores the way managers are thinking about contemporary HRM issues, concerns, and practices, and their plans for development for the future, in the context of the oil and gas industry in Kazakhstan. It provides insight which should be helpful for employers, enabling them to compare their perspectives and opinions with the aggregated data and literature presented in this study. Hopefully, it will encourage them to consider more strategically and systematically the things they can do to more effectively position their HRM efforts. A further major theoretical contribution of this study is the scope of its literature review. It includes a brief introduction to human resource management issues globally and then more specifically in the CIS regional context, considering particularly the debate of convergence and divergence of practice. It reviews HRM issues in organization globally and in Kazakhstan. Commentary is offered on the still embryonic development and coverage of scholarship into HRM in the oil and gas 10

industry compared with ‘mainstream’ studies of HRM. The literature review also provides a map of issues against which to locate and compare the issues identified by the practitioners interviewed in this study. This study provides incremental knowledge about those HRM practices or systems that have a greater impact on a firm’s performance (lower turnover) than others, as not all HR practices boost value and not all HR practices may be as equally effective in increasing the commitment level and lowering turnover intentions. Therefore, findings of this study may distinguish between those HR practices, which may assist in lowering the turnover intentions, from those that are simply neutral or worse, which may increase turnover intentions. The study also offers some practical suggestions for the enhancement of HRM efforts. First, as a result of this study several HRM system improvement practical recommendations were developed. A second contribution is investigation of unique mediating effects of organizational commitment on the relationship between HRM practices and intention to leave. The results suggest that when employees believe that their organization intends to support them and expresses its commitment to its employees through its HRM practices (training, rewards, etc.) it makes the employees more committed to the organization and lowers employees’ intention to leave. There has been very little empirical research examining this relationship in Kazakhstan oil and gas industry. Finally, this research, in both its method and content, has the potential to stimulate further comparative studies which examine HRM issues, functions and practices across the oil and gas industry, and other Kazakhstan’s industries more generally.

1 THEORETICAL AND METHODICAL BASIS OF HUMAN RESOURCES MANAGEMENT PRACTICES 1.1. Sustained competitive advantage, human resources and human resources practices theories In a highly competitive economic context, characterized by such phenomena as the globalization of markets, changing customer demands and increasing product-market competition, people and the way they are managed acquire greater importance because many other sources of competitive success are less powerful. But, to achieve competitive success through people involves changing our way of thinking about employment relationships. It means successfully working with people, and seeing HR as a source of competitive advantage rather than as merely a cost. From the Resources Based View (RBV) approach, we can consider that the human resource, or human capital, in which the company invests, has the potential to create superior performance. The RBV points out that firms can develop sustained competitive advantage only by creating value in a way that is rare and difficult for competitors to imitate [2,3]. According to Barney, resources fall into three categories: physical capital resources, human capital resources and organizational capital resources. Physical capital resources consist of such things as the firm's plant and equipment, technology and geographic location. Human capital resources include such things as the experience, judgment and intelligence of the individual managers and workers in the firm. Organizational capital resources consist of such things as the firm's structure, planning, controlling and coordinating systems, and the relations among groups within the firm and other firms in its environment. Definition of sustained competitive advantage, human resources, and human resources practices Barney describes a competitive advantage as occurring 'when a firm is implementing a value creating strategy not simultaneously 12

being implemented by any current or potential competitors' [2, p.102]. According to the resource-based view of the firm, competitive advantage can occur only in situations of firm resource heterogeneity and firm resource immobility. In his book “Competitive Advantage through People”, Pfeffer argues that the source of competitive advantage has always changed over time and will continue to change under future economic conditions [4]. Currently for firms to obtain a Sustained competitive advantage (SCA) they must look to human capital to gain an edge on the competition. According to Pfeffer, “Traditional sources of success, such as product and process technology, can still provide competitive leverage, but to a lesser degree, leaving organizational culture and capabilities, derived from how people are managed, as comparatively more vital” [4, p.87]. Sustained competitive advantage is distinct from the concept of competitive advantage. Within the resource-based view, a sustained competitive advantage exists only when other firms are incapable of duplicating the benefits of a competitive advantage. Therefore, four criteria must be attributable to the resource in order for it to provide a sustained capital advantage: 1) the resource must add positive value to the firm; 2) the resource must be unique or rare among current and potential competitors; 3) the resource must be imperfectly imitable; and 4) the resource cannot be substituted with another resource by competing firms [2, р.114]. So, ‘although traditional sources of competitive advantage such as natural resources, technology, economies of scale, and so forth, create value, the RBV argument is that these sources are increasingly easy to imitate, especially in comparison to a complex social structure such as an employment system’ [5, p.780]. If that is so, a properly developed HR system may be an especially important source of sustained competitive advantage. Barney defines human resources as the pool of human capital under the firm's control in a direct employment relationship. Human resource practices, on the other hand, are the organizational activities directed at managing the pool of human capital and ensuring that the capital is employed towards the fulfillment of organizational goals [6].

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Human resources constitute a source of competitive advantage because they are valuable, rare, inimitable and non-substitutable resource. Firms that know how to establish an HR system that incorporates HR policies and practices in order to create and maintain the strategic human capital could have a sustainable competitive advantage. Human resources are rare because it is difficult to find people who guarantee high performance levels in the organization due to the labour market’s heterogeneity. Their inimitability emerges from the difficulty in duplicating people’s knowledge, abilities, experience and behaviour, at least in the short term. Moreover, the high transaction costs involved in people recruitment can be a significant obstacle to their mobility or acquisition. Finally, people are a resource difficult to replace because not everybody has the same capacity to adapt to the different environments and technologies, and those who are able to create value in one context may be unable to do so in others [7]. Having pointed out the importance of HR in the creation of firm-specific competitive advantage, the question then is whether, or how, firms can capitalize on this potential source of profitability. Our argument now centers on HR strategy that involves the integration of the HR generic functions: selection, appraisal, promotion and compensation. According to Bailey, managers can use HR practices, such as the development of selection, appraisal, training and compensation systems, to attract, identify and retain high-quality employees [8]. Thus, a firm which develops a valid selection system and has attractive HR programmes, such as higher than normal compensation packages and numerous development opportunities, can attract, select and maintain the highest quality resource pool. Also, reward systems, communication systems, training programmes and socialization systems that encourage employees to act in the interests of the firm can be developed. Thus, HR practices influence employee skills through the acquisition and development of a firm’s human capital. Recruiting procedures that provide a large pool of qualified applicants, coupled with a reliable and valid selection regimen, will have significant influence over the quality and type of skills that new employees possess. Providing formal and informal training, such as basic skills training, on-the-job experience, coaching and so on, can further influence the employees’ 14

development. As Boxall points out, ‘by hiring and developing talented staff and synergizing their contributions within the resource bundle of the firm, HRM may lay the basis for sustained competitive advantage’ [9, p.66]. Then, organizational HR practices can, if properly shaped, provide a direct and economically significant contribution to the firm’s performance. So, a firm which creates an effective HR system incorporating HR practices to exploit the potential for synergies among such practices has the capability to recognize the intrinsic value of HR in developing new strategies before its competitors. Thus, for the purposes of this study, an HR system is defined as ‘an organizational capability which involves the strategic integration of the set of HR activities, functions and processes: selection, training, appraisal, promotion and compensation, carried out to attract, develop and maintain the strategic HR that allow the firm to achieve its goals’ [9, p.70]. Thus, strategic HRM can lead to competitive advantage only if effective resource mobility barriers exist. Thus, from the RBV, and according to Becker and Gerhart, a properly developed HR system is an ‘invisible asset’ that creates value when it is so embedded in the operating systems of an organization that it enhances the firm’s capabilities [5, р.784]. An HR system deeply embedded in the organization is difficult to imitate because, first, it is difficult to identify the precise mechanisms by which HR practices interact and create value. To imitate a complex system, it is necessary to understand how the elements interact. Without being able to understand how an HR system works, it is impossible to imitate it. It is even difficult for a competing firm to imitate a valuable HR system by hiring away one or a few of the top executives because the understanding of the system is an organizational capability that is spread across not just a few but many people in the firm. Second, these HR systems are path dependent. They consist of policies that are developed over time and cannot simply be purchased in the market by competitors. A competitor, although able to understand that a system is valuable, is precluded from immediate imitation by the time required to implement the strategy fully (assuming the system could be understood). Furthermore, there may be limits to the management’s ability successfully to reproduce

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socially complex elements, such as interpersonal relationships and culture. The RBV also suggests that HR systems can contribute to sustained competitive advantage through facilitating the development of other capabilities that are firm specific, produce complex social relationships, are embedded in a firm’s history and culture and generate tacit organizational knowledge. These capabilities may be expanded, upgraded and maintained through an HR system that emphasizes: hiring employees for the organization as a whole, extensive socialization of newly hired employees, developmental performance appraisal, a skill-based compensation strategy and comprehensive training and development to provide new knowledge, skills and abilities, which are needed to achieve long-term productivity. Conversely, these organizational capabilities can depreciate through, among other things, lack of congruence of values between the focal employees and the organization, ethically ambivalent HR, assignment of employees to jobs with low perceived significance and meaningfulness, and other organizationally induced physical and emotional problems of the employees. The resource-based view of the firm Central to the understanding of the resource-based view of the firm are the definitions of resources, competitive advantage and sustained competitive advantage. Barney expands this definition to include 'all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness' [2, p.101]. Competitive advantage. In the resource-based view of the firm, these resources are the sources of competitive advantage. Barney describes a competitive advantage as occurring 'when a firm is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors' [2, p.102], and these assumptions serve to differentiate the resource-based model from the traditional strategic management model. Firm resource heterogeneity refers to the fact that resources vary across firms. In contrast, in the environmentally focused strategy model, firm resources are viewed as homogeneous across firms in an industry. 16

Firm resource immobility refers to the inability of competing firms to obtain resources from other firms or resource markets. In the environmentally focused strategy model, resources are considered mobile in that firms can purchase or create resources held by competing firms. Sustained competitive advantage. Thus, a competitive advantage is not considered sustained until all efforts by competitors to duplicate the advantage have ceased. In the search for sources of sustained competitive advantage, Barney comments that 'the resource-based model of strategic management suggests that organization theory and organizational behaviour may be a rich source of findings and theories concerning rare, nonimitable, and non-substitutable resources in firms' [2, p.116]. The remainder of this paper will attempt to answer this call for the integration of organizational behaviour theories and findings with the resourcebased view of the firm, specifically presenting a firm's human resources as an important potential source of sustained competitive advantage. Human resources as a firm resource. Prior to discussing the potential of human resources for constituting a sustained competitive advantage, it is important to clarify our conception of human resources. Second, we go beyond these models by recognizing that the characteristics of individuals do not provide value to the firm unless they are utilized through employee behaviour, broadly defined. Much of the writing in the strategic human resource management literature has focused on employee behaviour, rather than on employee skills, as the mediator in the relationship between a firm's strategy and performance. However, Wright and Snell present an open system model of the Human Resource System which explicitly notes the interrelationships between employee Knowledge Skills Abilities (KSAs) and employee behaviours . According to their model, KSAs are necessary, but not sufficient for employee behaviour to be in line with firm goals [10]. This thesis, consistent with Wright and Snell, distinctly recognizes that, although employee behaviour is the most direct way in which strategies are implemented, employees must have the competencies (KSAs) necessary to exhibit the behaviours. Although this point may seem obvious, much of the literature on strategic 17

human resource management has focused on employee behaviour and has virtually ignored employee competencies. In fact, in their delineation of the 'Behavioural Perspective', Schuler and Jackson stated 'the rationale developed is based on what is needed from employees apart from the specific technical knowledge, skills, and abilities required to perform a specific task'[11, p.208]. Given this underlying foundation for our treatment of human resources within the context of the resource-based view of the firm, the remainder of this paper will discuss how human resources can be an important source of sustained competitive advantage and one over which managers have control. We will discuss human resources within the criteria of a sustained competitive advantage, specifically describing human resources as valuable, rare, imperfectly imitable and nonsubstitutable. According to the resource-based view, in order for a resource to qualify as a source of sustained competitive advantage, the resource must add value to the firm, it must be rare, it must be inimitable and there must be no adequate substitutes for the resource [2, р.118]. Therefore, in this section we will show how human resources qualify as such a resource by examining how they meet these criteria. Human resources as valuable. First, in order for human resources to be a source of sustained competitive advantage, they must provide value to the firm. Steffy and Maurer pointed out that Firm Specific Human Capital Theory provides an examination of the conditions under which human value creation is and is not possible [12]. According to this theory, when both the demand for labour is homogeneous (i.e.., employees are perfectly substitutable) and supply of labour is also homogeneous (all employees and potential employees are equal in their productive capacity), there is no variance in individual contribution to the firm. In this situation, it is not possible to create value through investment in human assets. However, Steffy and Maurer noted that, in fact, both the demand for labour is heterogeneous (i.e., firms have different jobs which require different skills) and the supply of labour is heterogeneous (i.e., individuals differ in both the types and level of their skills) [12]. Thus, there is variance in individuals' contribution value to the firm. This argues that human capital can create value for the firm. Traditionally, conceptualizing the value human capital resources 18

provide has been quite elusive. However, recent work in the area of utility analysis for human resource programmes has provided both a theoretical rationale for the ways in which human capital resources increase firm value and techniques for estimating this increase in value. Human resources as rare. Second, a resource must be rare if it is to be a source of sustained competitive advantage. One could easily argue that human resources are not rare, due to the fact that, where unemployment exists, there is obviously an excess of workers. Related to the issue of the homogeneity of labour supply discussed above, to the extent that all current and potential employees have the same skill levels, human capital resources could not be considered rare. In fact, much of the scientific management literature is focused on designing jobs in a way that makes human skills irrelevant to performing a job. Campion noted that the scientific management literature calls for designing simplified jobs which require no (or few) specific skills. To the extent that jobs are designed in this way, skills become relatively irrelevant; thus, human resources can be characterized as a commodity rather than a rare resource. However, to the extent that jobs require skills which allow for variance in individual contributions (i.e., when job-relevant skills are no longer a commodity), these skills should be normally distributed in the population. Thus, under these conditions, high quality human resources are rare. For example, as previously discussed, one measure of the quality of human resources is cognitive ability due to its consistent empirical support as one of the best, if not the best, predictors of performance in work organizations. For the purpose of this analysis, cognitive ability measures are useful as a surrogate measure of the quality of the human resource pool. Although many different characteristics could be identified and analyzed, we will focus primarily on differences in cognitive ability for the following reasons. First, cognitive ability has been consistently demonstrated to have a strong positive relationship with individual job performance. In fact, it is usually cognitive ability tests that have been used in demonstrating the value of selection to organizations in utility examples [13]. Underlying these analyses are, of course, the assumptions that it is cognitive ability which is responsible for the increased economic value of the firm 19

and that the test is the method of determining applicants' relative standing on this attribute. Second, there is substantial evidence that cognitive ability is a relatively stable attribute which is normally distributed in the population. In any of the analyses which follow, one could either substitute other, or add additional, characteristics which are related to firm performance without diminishing the analysis. Because cognitive ability is normally distributed in the population, human resources with high ability levels are, by definition, rare. Thus, it is safe to say that firms with high average levels of cognitive ability relative to their competitors possess more valuable human capital resources than those of competitors. For example, in demonstrating how the use of the programmer aptitude test could increase productivity in the national economy, Schmidt et al. noted that 'Since the total talent pool is not unlimited, gains due to selection in one job are partially offset by losses in other jobs' [14, p. 624]. Similarly, because the total talent pool is not unlimited, firms which have a high level of human capital resources (in terms of cognitive ability) are gaining this capital at the expense of other firms. Human resources as inimitable. Third, in order for a resource to be a source of a sustained competitive advantage, the resource must be inimitable. If the competitive advantage gained from having high quality human resources is easily imitated, then it is not possible for human resources to constitute a source of sustained competitive advantage. What is necessary for a resource to be imitated? First, competitors must be able to identify exactly the source of competitive advantage (i.e., the exact components of the human capital resource pool which are providing the advantage). Second, the competitor must be able to duplicate exactly both the relevant components of the human capital resource pool and the circumstances under which these resources function. In order to discuss the imitability of high quality human resources, the concepts of unique historical conditions, causal ambiguity and social complexity must be addressed. In addition, the potential mobility of human resources must be considered with regard to the imitability of human resources. Unique history, causal ambiguity and social complexity. Unique historical conditions determine a firm's place in time and space 20

[2, р.119]. Within the resource-based view, the ability of a firm to acquire and exploit particular firm resources depends upon its unique history. Causal ambiguity exists when the link between a firm's resources and a competitive advantage is imperfectly understood. If other firms cannot identify specifically the way in which a firm resource acts as a competitive advantage, it is virtually impossible for them to imitate the responsible resources. Finally, social complexity refers to the fact that many social phenomena are so complex as to make it impossible to manage or influence them systematically. A competitive advantage that arises from the social complexity of a firm's interactions cannot be imitated. Human resources are perhaps unique in their ability to give rise to and be influenced by unique historical conditions, causal ambiguity and social complexity. It is possible that human capital resources, over time, are imitable in terms of their ability levels. For example, a firm may have developed a work-force which has a higher level of cognitive ability than its nearby competitors, yet a competitor firm in a different geographic location might be able to develop a work-force of equal ability. However, the way in which the human resources act as a competitive advantage may be determined by unique historical conditions, be subject to causal ambiguity or stem from social complexity. To understand this, the distinction between abilities and behaviours is important. While individuals must have the abilities to exhibit required behaviours, having the necessary abilities does not ensure that the required behaviours will be exhibited. Firms have unique histories, over the course of which particular cultures and norms develop. Through the culture and norms, human capital resources may be melded together to create a synergistic work culture where individuals work co-operatively in line with organizational goals. On the other hand, the culture and norms may reflect a situation of self-interest and distrust, where the advantages of rich human capital are not exploited. The unique history of firms is impossible, or at least excessively costly, for competitor firms to duplicate. Thus, to the extent that history is related to a competitive advantage associated with human resources, this advantage is not, for all practical purposes, imitable. Human resources may also be the source of causal ambiguity. This will occur with team production. Because output is not the sum 21

of the separable outputs of each co-operating resource, it may be impossible to identify the source of the competitive advantage that arises from team production, i.e., there is causal ambiguity. Because of the rareness of human resources, it is unlikely that a competing firm could create a team with exactly the same attributes as the focal firm's team and thus imitate its competitive advantage. Social complexity may arise from transaction-specific relationships, and the competitive advantage they comprise may be due to transaction specific human capital. It is possible that relationships between key personnel such as sales representatives and buying agents will develop over time and become part of a network that includes a larger group of personnel such as design and marketing staff, production and distribution workers, and management, as well as final consumers. A very complex social situation may result and may constitute a competitive advantage for the firm. Although the relationship may be too complex to dissect, it is reasonable to speculate that the value of the social relationship may be due to transaction-specific human capital, that is, the knowledge and trust that are developed over time by the focal personnel and which have value only in the focal relationship. Human resources and social complexity are intrinsically linked because social complexity, by definition, must result from human interactions [15]. Thus, in theory, competitive advantages stemming from culture or norms, team production or transaction-specific human capital might be imitable if one were able to identify and replicate the exact historical occurrences and the interactions, programmes and personalities within the firm. However, this is highly unlikely due to the many contingencies that exist in different organizational situations. This is similar to the distinction between field studies and laboratory experiments. In field studies, a researcher is never able to identify and control all of the possible contingencies in order to understand the exact causal connections among variables. In contrast, in a laboratory experiment, the researcher is able to control virtually all environmental contingencies, thus making the causal effect less ambiguous. The reality is that firms are not laboratories. Hence, human resource advantages are most frequently characterized by unique historical conditions, causal ambiguity and social complexity, and, thus, are almost always inimitable. 22

Resource immobility and human resources. One potential problem with the idea that human resources are inimitable is the notion that human resources are highly mobile. If human resources are highly mobile, a competing firm does not have to imitate the human resources of the focal firm, it can simply hire them away. As we will show, however, these resources are far from being perfectly or even highly mobile. First, human resources are not perfectly mobile because there are substantial transaction costs involved in moving from one employment situation to another. The costs of determining all relevant alternative job situations may be quite high, the worker must weigh the probability that a future employment situation will be significantly better than the present employment situation, and the worker must incur non pecuniary (and possibly pecuniary) costs of relocation. Second, with causal ambiguity or social complexity, it may not be apparent which personnel are responsible for the competitive advantage. Hiring away teams is a possibility, but even a team's effectiveness may depend on unique historical circumstances or relationships with other teams. At the extreme, hiring the appropriate team might mean hiring the entire work-force, which constitutes acquiring the firm. Even then, the effectiveness of the human capital resources may be tightly coupled to the physical or organizational capital resources. Thus, unique historical conditions, causal ambiguity and social complexity strongly influence the inimitability of human resources. In addition, these same conditions result in sustained competitive advantages stemming from human resources being immobile. In addition, it is through the combination of social complexity, causal ambiguity and unique historical circumstances with imperfect mobility that the value created by human resources is accrued by the firm. In the absence of these conditions, individuals would be able to capture the additional rents associated with their higher human capital. However, because their inputs are usually associated with team production, individuals cannot specifically measure their contribution, and, thus, are not able to capture the rents. Thus, these rents accrue to the firm, increasing firm value. Human resources as non-substitutable. Finally, a resource must not have substitutes if it is to be the source of a sustained competitive advantage. This raises the question of whether or not other firm 23

resources, such as technology, have the potential for offsetting any competitive advantages attributable to human resources. To the extent that other resources are able to substitute for advantages associated with the human capital resource of the local firm, then human resources do not have the potential to act as a sustained competitive advantage. In order to address this issue, it is important to note that human resources are one of the few firm resources which have the potential to a) not become obsolete and b) be transferable across a variety of technologies, products and markets. Although the rapid pace of technological change has resulted in new technologies which make former technical skills obsolete (i.e., having a short halflife), many human capital resources are quite generalizable. Returning to our example of cognitive ability as a relevant resource, if a firm has obtained individuals with high levels of cognitive ability, then constant training in state of the art technological knowledge ensures that the resource does not become obsolete. In addition, general human capital resources such as cognitive ability are transferable across a wide variety of technologies, products and markets. In fact, Schmidt, Hunter and Pearlman found that the validity of cognitive ability was consistent even across extremely dissimilar jobs [14]. Therefore, we argue that it might be possible to substitute other resources in the short term, but it is highly unlikely that such substitution could result in sustained competitive advantage. This stems from the fact that, to the extent that the resource offsetting the advantage of human resources is not, in and of itself, rare, inimitable or non-substitutable, then it will be imitated and human resources will once again constitute a competitive advantage. 1.2. Evolution of Human Resources Management versus personnel management theories Personnel management: a problem of relevance. A persistent theme in the literature is that the personnel management function lacks strategic relevance because it is locked into a mainly administrative-type role. There is a potential conflict in its relationship with line managers because human resource management is a dimension of all managerial roles. The seeds of its problems are

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traceable to its origins in the Industrial Revolution when a combination of factors, notably a commodity philosophy of labor, the introduction of scientific management and laissez-faire government led to the births of both the trade unions and the welfare movements. The introduction of welfare workers into organizations was viewed by many trade unionists as a cynical managerial control tactic. Two additional factors contribute to weaknesses in the function. Failure to develop a sound theoretical base has tended to result in piecemeal prescriptive textbook interventions which too frequently have been experienced by management as out of context with the needs of the organization and therefore irrelevant. Prominent among suggested solutions to its problems has been advice to get involved at strategic level. Recent research findings suggest evidence of a shift in responsibilities for many aspects of personnel management away from the function and towards line management. Less pessimistically there are reports that a rapidly changing environment for business, which has resulting in globalization and a need for competitiveness, has been causing management to bring a new focus to bear on how human resources are organized and managed. It is suggested that this will create opportunities for the function to develop a more strategic role [15]. In fact, advice to become strategically involved outstrips any theoretical and applied perspectives on how to achieve strategic integration. Literature reviews revealed two distinct strands. There was: quite widespread use of the term ‘human resource management’ frequently referred to by the abbreviation (HRM); (b) emergence of the term 'strategic human resource management'. The concept of HRM. Literature dating from the early 1970s documents the appearance of HRM as a replacement for personnel management and describes a change in the function's boundaries, substance and objectives. There is emphasis on integrating human resource planning with the strategy of the organization, a radical departure from an older maintenance model defined by Burack and Smith, as being characterized by 'Taylorism, control, efficiency, low cost and the 25

containment of conflict'[16]. In a footnote to their 1982 human resource management text, Foulkes and Livemash refer to the different terms in the literature and indicate that the terms are being used 'synonymously' by them and with 'no fundamental differences in meaning' being intended [17] . There is a conscious linking of the personnel management function with the line role. Klatt, Murdick and Schuster, in a book entitled Human Resource Management, define their concept as covering all activities by both line and personnel managers [18]. Fisher, Schoenfeldt and Shaw, in a text entitled Human Resource Management, echo much the same sentiments [19]. The human resource manager is in 'a value-adding partnership' with line managers and by their combined efforts they contribute to organizational goals. However, in a new departure for such texts, they include a penultimate chapter on strategic human resource management in which, using a rational planning model of formulation and implementation, they discuss human resource practices, strategic issues and options in relation to grand corporate strategies. A major contribution towards understanding the HRM concept has been made at Harvard Business School, firstly in 1980, through the introduction of a human resource management syllabus, for the first time; into year 1 of the MBA program, and secondly, in 1984, through a research colloquium in which academics and business managers considered the future character of HRM. The syllabus was a 'synthesis of the organization behavior/development, labor relations and personnel administration perspectives' of the teaching group, among whom there was conviction of the growing strategic importance of human resources as a source of competitive advantage. Spurred on by environmental pressures and difficulties in managing the work-force, general managers had to make important decisions in the area of human resource management [20]. The 'Harvard Analytical Framework' for human resource management is a 'broad causal mapping of the determinants and consequences of HRM policies'. It has components of stakeholder interests, situational factors, HRM policy choices, HR outcomes of com26

mitment, competence, congruence and cost-effectiveness, and longterm consequences in which they include organizational effecttiveness, individual and societal well-being. Situational factors and stake- holder interests act as constraints on HRM policies and can also be influenced by these policies. HRM policy choices affect immediate organizational HR outcomes and also have an effect on long-term consequences. In one of the outputs from the 1984 research colloquium, Lawrence, taking an historical perspective, suggests that the balance of influence between employer and employee has shifted over time in response to the phases of industrialization, which has resulted in five different human resource systems [21]. The craft system was characterized by mutuality of interest between the master craftsmen and employee/s. With trade expansion came the market system and new pressures on the master craftsmen from merchant capitalists to reduce prices, which forced a reduction in labor costs often achieved through hiring unskilled labor. The conflict generated through such loss of employment security led to the formation of unions and escalation of conflict. This increased conflict coincided with the onset of the technical system characterized by automation of machinery and theories of scientific management based on division of labor, minimum training and management control mechanisms. The returns to the employer were high output, low conflict, flexibility and, in the early days of the system, low turnover because of the attraction of high wages. Personnel management was introduced into many large companies in a form of welfare capitalism. The expected cooperative climate was greatly curtailed by widespread unemployment during the Great Depression. Collective bargaining became the norm for regulation of the employer/employee relationship. When the market changed to one requiring customized, high quality goods, the technical system was too inflexible to respond. Changing expectations of a better educated work-force were also challenging the motivational assumption of management that bargaining for high pay was sufficient return for boring dead-end jobs. Another pressure on the 27

technical system was that industry-wide settlements could increase labour costs to the extent that companies would be vulnerable to foreign competition. One response to these problems was the career system, the dominant pattern of HRM. It was initiated by the developing electronics industry, which was rapidly expanding into international markets. Its key features are: recruitment to positions having clear duties and rights, each of which is linked to a career ladder; longterm employment, with lay-offs only as a last resort; seniority and merit are taken into account in decisions regarding employee flows and rewards; employees are non-union, their right to express grievance is protected and work organization consists of loosely structured groups of technically related positions reporting to a supervisor. While there have not been major problems with the career system, Lawrence suggests that there may be some in store, in particular the effects of severe depression when this causes lay-offs. Awareness of the problems associated with both the technical and career systems has led organizations to experiment with a commitment system which draws on a variety of experiences, such as: American programs of job enlargement; British socio-technical planning; the quality of work life approach; gain-sharing experiences; European work councils; Japanization: quality circles and life-time employment policies. Pivotal to the commitment system are processes for ensuring multi-level employee representation and for organizing work to increase employee involvement. The commitment system marks a shift in societal values away from traditional authority and compliance. It is an attempt to replace the control orientation which has characterized the earlier systems. Its radical difference lies in that it aspires to promote mutuality of interest between employer and employee through altering the relationship by increasing the autonomy, responsibility and influence of employees at all levels. The common thread of the new polices is first to elicit employee commitment and then to expect effectiveness and efficiency to follow as second order outcomes. Table 1 demonstrates

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views on the contrast between the two systems and their differing human resource management policies. Table 1 − Policy characteristics of the control-based and commitment-based HRM Systems Policy area 1 Job design principles

Management Organization

Compensation

Control-based HRM system 2 Sub-division of work: Specific job responsibility; Accountability for specific job responsibility; Planning separated from Implementation. Top-down control and co-ordination: Management prerogative; Status symbols; Hierarchy. Fair day's work for fair day's pay: Job evaluation; Individual incentives.

Assurance

Labour a variable cost.

Employee voice

Non-union (open door policy, attitude surveys).

Labour management Relations

Adversarial.

Management Philosophy

Management prerogative; Management's exclusive obligation to shareholders.

Commitment-based HRM system 3 Broader jobs: Combined planning and Implementation; Teams.

Flat structure: Shared goals for control and co-ordination; Status minimized. Reinforcing group Achievements: Pay geared to skill and other contribution criteria; Gain-sharing, stock ownership, profit sharing. Mutual commitment: Avoid unemployment; Assist re-employment. Mechanisms for giving employee voice on issues. Mutuality: Joint problem-solving and Planning. Emphasis on claims of all Stakeholders; Fulfillment of employee's needs is a goal rather than an end

Remark - Source: adapted from Walton (1985)

Beer and Spector's research indicates that the commitment model tends to differ in focus between the two, with old (unionized) 29

organizations focusing on labour costs, productivity, quality, and dealing with adversarial relations, and the newer (non-union) organizations concentrating on attracting, satisfying and motivating highly skilled professional employees. In their view the commitment model is a transformation which has its basis in a new set of assumptions [20]. Table 2 indicates the nature of the philosophy underpinning these assumptions. Table 2 − New assumptions about the management of people which underpin the commitment-based HRM system Assump tion 1 1

Philosophical shift

2 Organizations are open systems with effectiveness defined as being successful in achieving a fit between its various components and between the system and its environment. There is a change of emphasis towards linking HRM with strategic planning and developing a culture that supports this and away from piecemeal interventions in response to specific problems. 2 People are capable of growth in terms of skills, values and commitment if and when the work environment encourages this. People therefore are social capital rather than variable costs. 3 There is a long-run coincidence of interests between all of the various stakeholders of the organization. This requires a shift from a climate in which self-interest dominates. 4 Power equalization is a key factor in encouraging openness and collaboration among stakeholders. This is in contrast with the old assumption that there must be managerial control to enhance power and efficiency. 5 Open communication builds trust and commitment. Instead of adversarial 5 Relationships there are encouragement of mutuality of interest between employers and employed. 6 Employees will be motivated and the organization more effective if they work towards organizational goals that they accept as legitimate. 7 People who participate in defining problems and solutions will become committed to the new directions that result from the process of participation. This is in contrast to hierarchical control from the top Remark - Compiled by author from source [20]

The above views are complemented by McKersie whose research suggests a transformation, brought about by environmental changes, 30

in the traditional industrial relations system, with organizations modeling themselves on the successful non-union companies and the Japanese system of management [22]. A transitional model is thought to be emerging in which unions have board representation at strategic level; a new agenda of concession bargaining, centered on employment security and gain sharing, at middle management level; and experimentation with programs of quality of work life, quality circles, productivity task forces and joint labor-management committees at workplace level. Over time, human resource management (HRM) concepts have evolved from originally having their focus on welfare and administration to an emphasis on employee motivation and job satisfaction. This is mainly in response to modern social concerns with employees’ rights and their personal and development needs. Over the past few decades, this has resulted in the rise of human resource (HR) ethics and employee-oriented HRM, such as high involvement HRM, flexible employment, family–friendly HRM and work–life balance. Since the 1960s, employee-oriented HRM practices have been developed and these include the following: work systems and job design to satisfy human motivational needs, especially the need for autonomy, equality, skill development and self-actualization, participation and involvement, power sharing and control, and flexible working hours and/or employment. The stakeholder approach suggests that organizations develop a system of employee involvement and participation in decisionmaking through formal and informal consultation methods. Moreover, freedom of association and collective bargaining are the core ILO labour standards that exercise employees’ autonomy. Furthermore, training and development are positively associated with employee job satisfaction and organizational performance [23]. High investment in training and development and the use of appraisal result in training and career and management development help meet employees’ development needs. These employee-oriented HRM practices provide employees with an organizational support to meet their career and managerial development needs. ‘Family-friendly HRM’ or ‘work-life balanced HRM’ are popular employee oriented HRM practices developed to meet an employee’s personal needs 31

through avoiding work/family conflict. These HRM practices allow employees time off and adopt flexible employment programmes and working hours in order for them to meet family responsibilities. The studies in HRM covering the relationship between organizational systems, structures and processes and HR practices, focus on various types of organizational systems. For example, McDuffie studied HR practices and work system practices, such as work teams, problem-solving groups, job rotation, and decentralization of quality-related tasks. He introduces the term 'organizational logic' of flexible production, which links together a bundle of manufacturing practices with a bundle of HR practices, and found that both productivity and quality are superior in lean production plants, with flexible production systems containing both innovative work system and HR practices [24]. Lawler et al. studied the relationship between high involvement practices and total quality management practices, and found that these practices are most frequently coordinated and managed as one integrated program [25]. Snell and Dean examine the relationship between integrated manufacturing, covering advanced manufacturing technology, justin-time management, and total quality management, and HR practices. They found that advanced manufacturing and total quality management were positively related to HR practices like selective staffing, training, appraisal, and rewards, whereas just-in-time management was negatively related to selective staffing and performance appraisal [26]. Shaw, Gupta, and Delery examine the interactive relationship between integrated manufacturing and compensation practices and find moderate support for the effectiveness of this congruence model [27]. Cooke also argues that achieving a competitive advantage requires the effective integration of both technology and HR strategies. He found that alternative workplace strategies differed by the degree of integration of technological and HR capabilities [28]. These studies indicate the effectiveness of aligning different types of systems used in manufacturing with HR practices and strategies. Research in the manufacturing sector has shown that HRM is affected by the dominant technology used in the sector and firm. Besides competitive strategy, the dominant technological system determines which requirements of employees are needed to be 32

successful. Becker and Huselid argue that "the most important aspect of fit is its embeddedness throughout the organization; it then represents an 'invisible' capability for effective strategy implementation"[29 p.58]. Similar corporate strategies are reflected in a variety of operating objectives and problems that are largely influenced by the skills, motivations, and structure of the workforce. Becker and Gerhart state that HR systems "only have a systematic impact on the bottom line when they are embedded in a firm's management infrastructure and help it solve real business problems such as product development cycle times, customer service, and so forth"[5, p.794]. Product and technological life cycles and the complexity of the product mix have an impact on the effectiveness of HR practices, thus achieving a fit between these organizational systems and the HR system is likely to enhance performance. Contrary to research which is strongly focused on manufacturing contexts, Verburg, Den Hartog and Koopman examined organizational fit in various sectors by looking at different kinds of organizational structures and their fit with different HR systems, which are combined in four different configurations of HR, employability and flexibility: the bureaucratic bundle, market bundle, professional bundle, and flexibility bundle [30]. These bundles vary on the dimensions compliance versus commitment, and individual versus organization. They find that two out of four configurations or bundles they developed occurred in the sample, and that the closer the HR system fits the 'professional' bundle -which focuses on commitment and on development as a task of the organization - the higher the score was on 'willingness to go beyond contract' and economic outcomes. Jackson, Schuler and Rivero focus on organizational characteristics that are assumed to be related to the patterns of behaviors employers need for effective organizational functioning [31]. They find that technology and organizational structure are linked to the HR system (in particular to compensation and training) in order to focus employees and managers on long-term business goals. Moreover, Bailey emphasizes that HR practices should work together in supporting organizational systems [8]. Aligning or changing only one HR practice - for example broaden employee tasks without making other changes in employment security and training - is much less effective if it is not accompanied 33

by broader changes in the relationship between managers and workers. The studies described above have found support for the alignment between HR practices with various organizational systems and characteristics, ranging from manufacturing and quality management systems to organizational structures. Most studies look at the alignment between HR practices and one specific system in the organization. However, the effects of the HR system on achieving a sustainable competitive advantage depend on a broader set of organizational processes, and systems. While existing studies in organizational fit suggest the effectiveness of integration between HR practices and different organizational systems and characteristics, we will define organizational fit as the alignment of HR practices with a broad set of organizational systems and characteristics. Boxall offers a view on organizational systems and processes by distinguishing between 'human capital advantage', and 'human process advantage'. Human capital advantage is achieved by selecting and training employees resulting in the organization having an 'exceptional' human resource base, whereas human process advantage refers to "a function of causally ambiguous, socially complex, historically evolved processes such as learning, cooperation, and innovation" [9]. Wright, Dunford, and Snell build on Boxall for explaining the relationship between this broader set of organizational systems and processes and the HR system. They argue that the HR system "helps weave employees' skills and behaviors within the broader fabric of organizational processes, systems and, ultimately, competencies" [32, p. 710]. In line with this, Wright et al. argue that the core competencies of an organization are embedded in human capital (i.e. organization's human resources), social capital (i.e. internal and external relationships and exchanges), and organizational capital (i.e. processes, technologies, systems), integrating human, social, and organizational factors [32, p.712]. Similar to Wright et al., Leonard-Barton also focuses on the different dimensions of an organization's core capability. Leonard-Barton distinguishes four dimensions of an organization's 'core capability' needed to achieve a competitive advantage, adopting a knowledge view. The first dimension − employee knowledge and skills − and 34

the second − technical systems − embody the content of the core capability, and the third dimension − managerial systems − and the fourth − values and norms − guide the processes of achieving this capability [33]. The above-mentioned typologies of organizational systems and processes emphasize the importance of human resources and other systems, characteristics, and resources of organizations. However, HRM researchers have yet to develop a model about how HR systems are effectively integrated with organizational systems and structures. To address this, a more thorough development of the concept of organizational fit is needed. Therefore, below, different perspectives will be selected through which organizational fit will be studied in order to identify key issues involved in organizational fit. The HR system can be used to achieve this alignment, allowing the organization and the employees to be effective through improving employee commitment and motivation, and enhancing product quality and productivity on the organizational level. The HR system is then integrated with strategically important business processes. Therefore, in order to be effective, "an HR bundle or system must be integrated with complementary bundles of practices from core business functions" [24, p.198]. Copying HR practices or systems from one organization and implementing them in another organization would not be effective as the specific organizational systems, structures, and processes in place are closely embedded in the organization. The importance of aligning different HR practices in a coherent and consistent HR system (internal fit), and this HR system with strategy (strategic fit) in order to increase productivity or financial performance has been widely emphasized in strategic HRM. Boxall and Purcell however, argue that the goal of labor productivity and efficiency is only relevant in a given market and for a given technology [34]. For example, the systems and human resource needs in a manufacturing firm are considerably different from those in a consultancy firm. In order to achieve long term agility, an organizational design is required in which systems, structures, processes, and human resources support each other such that a sustainable competitive advantage is achieved. In an overview of the strategic HRM literature, Wood introduces organizational fit, which 35

refers to the alignment of the HR system with other systems and characteristics within the organization [35]. However, research on organizational fit has been limited. Research has mainly focused on the manufacturing sector, for example on the work system in lean production, or the total quality management system. Little is known about organizational fit in other sectors. Moreover, the few studies that have tested organizational fit use very diverse approaches, and have focused mainly on the fit between the HR system and one other system in the organization. As mentioned before, HRM scholars have used different perspectives or 'lenses' through which organizational fit is studied, focusing on what constitutes organizational fit from the perspective of different types of organizational systems. Below, we set out to identify perspectives through which organizational fit can be studied which can be relevant across different sectors and contexts. MacDuffie uses the production system as a dominant perspective for studying HR practices and systems. The production system refers to the systems the organization uses in order to create added value, or to convert inputs to outputs (i.e. transformation process). The production system can take various forms depending on the type of organization, and can involve materials, documents, or information. For example, a manufacturing organization transforms materials along an assembly line, whereas service organizations transform information in the form of documents. The nature of the production system is an important determinant of how jobs are designed in the organization, and what knowledge and skills people need in order to perform the job. The nature of the production system affects different elements of job design, for example the use of self-managing teams, job enrichment, job rotation, task complexity and variety, and the amount of skill variety, task identity, or autonomy. HR practices can be used to support the production system such that employees meet the job requirements as determined by the design of work. MacDuffie for example, examines the alignment between HR practices and the production system by focusing among others, on whether the hiring criteria used in selecting employees are aligned 36

with job requirements, and the extent to which rewards are contingent on 'plant' performance, and find this alignment to contribute to plant productivity and quality[24]. Thus, the production system, or 'transformation process' of the organization gives rise to the division of labor in the organization, involving tasks and job requirements. To accomplish these tasks, control and coordination mechanisms are needed. Management control is defined as any process that helps align the actions of individuals with the interests of their employing firm. Merchant distinguishes three types of control systems to support management control: results control, action control, and personnel control [36]. Results control focuses on the achievement of certain goals, action control focuses on desired employee behaviors, and personnel control refers to social and cultural control, mainly through selection and socialization. Harzing presents a review of different control mechanisms distinguished by various researchers. She develops a typology of control mechanisms, consisting of personal centralized control, dealing with managerial hierarchy, centralization, and direct supervision; bureaucratic formalized control, aimed at specifying behavior that is expected from employees; output control, referring to control of results; and control by socialization and networks. This last category covers socialization, non-hierarchical communication, and cross-departmental relations [37]. Snell takes a control perspective in studying HRM, by examining the role of HR practices in manifesting control in organizations. Snell links performance appraisal, feedback, and reward systems to control systems regulating input, behavior, and results in order to motivate employees to show desired behaviors, and to achieve desired results [38]. Organizational culture can also be used to manage employee behaviors that are needed in order to accomplish organizations' tasks. Organizational culture can be regarded as part of control when using a broad definition of control as mentioned above, which includes both formal and informal aspects of control. Organizational culture then mainly covers informal control processes such as the above-mentioned control by socialization and networks. However, as organizational culture is widely used as an

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informal coordinating mechanism, we will separate organizational culture from control. We will not aim to assess organizational culture as a whole; instead we will focus specifically on how organizations use organizational culture in order to coordinate desired employee behaviors. The work of MacDuffie and colleagues, builds on socio-technical systems theory, which draws attention to the interrelatedness of organizations' structure, systems, and processes, integrating the technical and the social or human aspects of the organization, aimed at joint optimization of the social and technical system. Therefore, besides the production system, MacDuffie devotes attention to organizational culture and routines, defined as "established patterns of operation" as an important complement of high involvement work practices [39, p.425]. Similar MacDuffie, other authors have also focused on the role of HR practices in managing organizational culture. Organizational culture refers to a pattern of shared basic assumptions. Shared norms and values play an important role in organizations; many authors have emphasized the importance of values, norms, and organizational routines and culture for achieving a competitive advantage. Currie and Kerrin found that HR practices and systems are used in order to manage and reinforce organizational culture [40]. In sum, we have recognized three perspectives which can be used in order to study the alignment between organizational systems and characteristics and (sets of) HR practices: the production system, control system, and organizational culture. As little is known about organizational fit, and as the concept of organizational fit takes into account many different factors and variables, below we will take an exploratory approach by studying HR practices through the lenses of the production, and control system, and organizational culture.

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Table 3 − Perspectives to study the alignment between organizational systems and characteristics and HR practices Approach Production system

Authors MacDuffie (1995)

Description The production system refers to the systems the organization uses in order to create added value, or to convert inputs to outputs (i.e. transformation process). The production system can take various forms depending on the type of organization, and can involve materials, documents, or information. Control system Merchant (1985) Link performance appraisal, Harzing (1999) feedback, and reward sysSnell (1992) tems to control systems regulating input, behavior, and results in order to motivate employees to show desired behaviors, and to achieve desired results Organizational culture Currie and Kerrin Shared norms and values (2003) play an important role in organizations; many authors have emphasized the importance of values, norms, and organizational routines and culture for achieving a competitive advantage. Remark - Compiled by author from sources [24, 26]

1.3. The concept of HRM practices It is important to clarify the concept of human resources and the role of human resources in firm competitive advantage to understand how HR practices contribute to firm performance. Consistent with Wright et al. we define human resources as the pool of human capital under the firm's control in a direct employment relationship [41]. Human resource practices, on the other hand, are the organizational activities directed at managing the pool of human capital and ensuring that the capital is employed towards the fulfillment of organizational goals. The distinction between human resources and 39

human resource practices is important in terms of understanding the role of HR practices in firm performance because it focuses attention on the fact that HR practices are aimed at developing a skilled and motivated workforce. Thus, the human capital pool forms the foundation from which the workforce can influence firm performance. We propose following definition of HR practices: HR practices are the tools by which a pool of human resources can be managed. Through selection practices the firm seeks to identify individuals that possess relevant skills and abilities. Organizations also invest in the continuing skill development of their human capital pool through administering a variety of training aimed at increasing and maintaining each individual's job-related skills and providing development opportunities for individuals which broaden their skill base. Compensation systems are often used to attract individuals who possess the highest levels of skills. Finally, performance appraisal systems promote skill development through identifying specific skill needs of individuals. Thus, through selection, training, compensation and appraisal of employees, firms create a workforce that possesses all the competencies necessary to utilize new technologies and new ways of working effectively. A firm's human resources also impact on firm performance through exhibiting discretionary behaviour (e.g. activities, decision making, etc.) that provides value to the firm. Much of the writing in the strategic human resource management literature has focused on employee behaviour, rather than on employee skills, as the mediator in the relationship between a firm's strategy and its performance [11]. Thus, high performing firms must possess workforce members who are motivated to engage in discretionary behaviour directed towards achieving organizationally relevant goals [42]. Again, HR practices are the means through which firms seek to motivate employees to engage in discretionary behaviour that contributes to the achievement of the firm's goals. Firms can seek to distinguish applicants who are likely to be conscientious workers and who will be unlikely to engage in counterproductive behaviour that impedes organizational performance. Similarly, training programmes allow the firm both to communicate proper behaviours to employees and to socialize employees into the norms and culture 40

of the firm. Appraisal systems identify the extent to which individuals are engaging in both functional and dysfunctional behaviours. Through tying rewards to appraisal systems, firms are able to encourage the employees to exhibit those functional behaviours while refraining from the dysfunctional ones and, thus, to act in the interest of the firm. HR practices and firm performance. In strategic HRM research, Delery and Doty distinguish three main perspectives for theorizing the relationship between HRM and performance: the universalistic, contingency, and configurational perspective. The universalistic perspective holds that some HR practices are universally effective; regardless in which context they are implemented. The contingency and configurational perspectives are both fit approaches, arguing that the effectiveness of HR practices depends on their fit with elements of the context [44]. The contingency approach argues that the link between HR practices and performance is moderated by another variable. Strategy is often mentioned as the contingent factor in this relationship. The choice of an HR system is then determined by the content of the organizational strategy. For example, Schuler and Jackson linked different HR systems to the three competitive strategies defined by Porter: innovation, quality enhancement, and cost reduction. Youndt et al. also covered this link in their research by analyzing the moderating effects of manufacturing strategy (cost, quality, and flexibility strategies) on the relationship between HRM and performance [11, 45]. But other contingencies can also influence the relationship between HRM and performance, for example technology or organizational structure. Moreover, relationships with several control variables are often mentioned as contingencies. These control variables can be both at the organizational or sector level (such as organization size, branch of industry, etc.) and at the individual level (like age, gender, etc.). The contingency approach shows parallels with the selection and interaction approach as defined by Drazin and Van de Ven, and Venkatraman's fit as mediation, moderation, and matching [46]. The configurational approach focuses on patterns of equally effective HR systems in organizations, corresponding with the Drazin and Van de Ven's system approach, and fit as profile 41

deviation, gestalts, and covariation as defined by Venkatraman [47]. According to the configurational approach, for different organizations, different bundles of HR practices are considered to be effective. Configurational analysis looks for resemblance between the existing HR system and the ideal bundle of HR practices for that organization. The larger the deviation from the ideal type, the lower the performance of the organization will be. "In general, configurational theories are concerned with how the pattern of multiple independent variables is related to a dependent variable rather than with how individual independent variables are related to the dependent variable" [44]. They emphasize the importance of the specific pattern of those HR practices. These configurations represent nonlinear synergistic effects and higher-order interactions that cannot be represented with traditional bivariate contingency theories [48]. Because different bundles can perform well in different situations, there is an 'ideal type' bundle for each of these different situations. This ideal bundle can be theoretically-based or derived from empirical data. For example, Verburg, Den Hartog, and Koopman examined the fit between theoretically defined configurations of HR, employability and flexibility practices, and Paauwe developed HR configurations based on organizational structure typologies of Mintzberg [49, 50,]. MacDuffie empirically derived bundles or configurations of HR practices which "affect performance not individually but as interrelated elements in an internally consistent HR 'bundle' or system"[24, p.197]. Guest also proposes a typology of fit, based on the work of Sivasubramaniam and Kroeck [51, 52]. He distinguishes two dimensions along which the different types of fit in HRM can be ordered: criterion-specific versus criterion-free and internal versus external fit [51]. The dimension criterion-specific versus criterionfree was also used by Venkatraman, and the dimension internal versus external fit represents the application of the fit model to the field of strategic HRM [47]. Internal fit refers to a fit between different HR practices, whereas external fit implies a fit between the HR system and its context. Guest recognizes five types of fit within these dimensions: fit as strategic interaction, fit as contingency, fit as an ideal set of practices, fit as gestalt, and fit as 'bundles' [51]. 42

In addition to the impact of HR practices on HR skills and motivation, substantial theoretical and empirical attention has been directed at the relationship between various HR practices and firm performance. For example, selection practices have long been argued to result in a dollar-value impact for organizations. Many of the discussions of utility theory have conceptually demonstrated the value that accrues to firms using valid selection practices [13, 14]. With regard to the impact of training on firm performance, MacDuffie identified training as one of the core components of what they termed 'flexible production systems' [24]. They found these systems were considerably more productive than traditional mass production systems in terms of exhibiting both lower production times and fewer defects. In spite of the fact that managers are often skeptical about conducting performance appraisals, these systems are an important part of the control systems in organizations [38]. Youndt et al. found that developmental appraisals were related to manufacturing performance after controlling for industry environment and past performance, and that results-based appraisal were related to manufacturing performance for firms utilizing a cost strategy [45]. In addition, Delery and Doty found that appraisal practices were related to return on assets and return on equity among a sample of banks [44]. Evidence exists for the effectiveness of incentive systems that tie individual and group rewards to organizational performance [53]. Table 4 − Linking HRM Practices to Business Strategy Management Author(s) 1 Balkin & GomezMejia (1987, 1990)

Devenna(1984); Latham (1984); Laud (1984)

Contribution 2 Based on a sample of 192 strategic business units (SBUs), they found that two levels of organizational strategy, corporate and business unit are determinants of several SBU pay strategy dimensions. The findings support a contingency approach to compensation, that is, management adjusts its pay strategies to fit with the organizational strategy. Developed the role of performance appraisal as an integrating device for the strategic human resource system; Laud (1984) reported the results of his survey of performance appraisal (PA) practices among Fortune 500

43

Continue of Table 4 1

Galbraith & Merrill (1991)

Gomez-Mejia & Balkin (1992) Gomez-Mejia & Welbourne (1988) Gupta (1984)

Hambrick & Snow (1989) Kerr (1988)

Olian & Rynes (1984)

Schneider & Konz (1989)

2 companies. Over 80% of the reporting firms used PA to decide merit increases, provide feedback and decide promotions. Data from 79 high-technology SBUs support their argument that managers who had a higher salary would favor short term oriented marketing expenditures over R&D. To the contrary, managers who received long term incentives preferred investing in R&D and innovation oriented activities. Introduced the first text in strategic compensation.

Provide a critical review of the state-of-the-art in the field and examine over fifteen dimensions used in past research to identify compensation strategies. Developed six propositions relating six general manager characteristics to organizational strategy and effectiveness at two levels: corporate and business unit. Critically reviewed current research and suggested different compensation practices under different organizational and strategic contexts. In a study of 20 firms, performance evaluation systems varied systematically with diversification strategies. The process of diversification has a stronger effect on evaluation that does the degree of diversity. The author concludes that an organization’s Control process, and thus its evaluation system, does not remain static but evolves over time. Using a 5-stage model of staffing–choice of selection criteria, selection of recruitment method, development of marketing Strategy, choice of selection techniques and final decision–coupled with Miles and Snow (1978) typology, they devel-oped tentative propositions about the likely compatibility of certain staffing practices with organizational strategy. Defining strategic job analysis as the specification of the tasks to be performed and the knowledge, skills and abilities required for effective performance for a job as it is predicted to exist in the future, they outline the steps involved to conduct the proposed “multi-method job analysis.”

44

Slocum, Cron, Hansen & Rawlings (1985)

Based on their study of effective and ineffective plateaued salespersons in a Defender and an Analyzer (Miles and Snow, 1978) firm, they found that the strategic type had a significant effect on the incidence of plateauing and on the performance of the plateaued person. Sonnenfeld & Peiperl Realizing the need for a strategic focus in HRM research, (1988) they proposed a four-cell typology of career systems with assignment flow and supply flow as the two orthogonal dimensions. Their typology of Baseball Teams, Clubs, Academics, and Fortresses corresponds to Miles and Snow’s (1978) Prospectors, Defenders, Analyzers and Reactors. Sutton & Louis (1987) Recruiting and interviewing job applicants can be a valuable form of environmental scanning; regardless of whether the interviewing firm reevaluates its own strategic direction as a result of this information, it could nonetheless incorporate that knowledge into its external environmental data base. Remark - Compiled by author from sources [46-51]

Schuster's longitudinal study of twenty-eight sites found positive effects of a variety of gain-sharing plans on productivity and Hatcher and Ross found that changing from individual incentives to gain-sharing resulted in a decrease in grievances and an increase in product quality [149]. Thus, evidence exists for the effectiveness of selection, training, appraisal and compensation systems in impacting on firm performance. Employee participation as moderator of the HR practiceperformance relationship. While the research does not conclusively demonstrate the benefits of employee involvement/participation systems, it does provide evidence that, at least under some circumstances, these programmes can contribute to firm performance. In fact, the model of participation posited that organizational factors moderate the relationship between participation and both individual and organizational outcomes. This, of course, leads to the question as to what organizational conditions determine the effectiveness of participation systems.

45

Much of the research has been based on the assumption that participation increases performance through increasing employee motivation. However, recent research and thinking have questioned the assumption that participation impacts on performance through increasing motivation. It has become more apparent that the benefits of employee participation are likely to be realized because these employees often have better information for decision making that affects organizational outcomes. Cooke notes that a basic proposition for how participation programmes enhance firm performance is that employees have better and more complete knowledge and information about work tasks and work processes [28]. This places them in better position than managers to identify and correct problems as they arise in the work in order to optimize performance. Similarly, Wruck and Jensen define 'specific knowledge' as knowledge that is costly to transfer inside an organization, such as idiosyncrasies of customers, machines or processes. They note that specific knowledge exists at all levels of the organization: − top managers have specific knowledge regarding corporate strategies or interdependencies − Among departments while employees on the factory floor have specific knowledge regarding a particular machine [54]. They argue that the organizational rules of the game must be structured to provide incentives for individuals to develop and use specific knowledge effectively. This is best achieved through locating decision rights at the level where the specific knowledge exists; in other words, to allow lower-level employees to influence decisions about work processes at their level. However, if the major mechanism through which participation affects firm performance is through employees making more effective decisions regarding work processes, then human resource practices become even more important. In order for the full benefits of participation to be realized, the employees must have the skills to make good decisions as well as the desire to do so. 46

Both of these aspects are, again, largely influenced by the firm's selection, training, appraisal and reward systems. Thus, it is entirely likely that HR practices or participation alone might be weakly related or even unrelated to performance, but that, consistent with the model proposed here (figure1), maximal performance is gained only when they are 'bundled' together. In other words, firms will not gain the maximal benefit of HR practices that invest in developing the skills and motivation of the workforce unless the participative systems exist which provide the opportunities for the workforce to impact on firm performance. This is especially true in a capital-intensive process industry such as refining, since the technology can either be used to limit performance variation among individuals through deskilled work or it can be used to increase performance variation through upskilled work including extensive decision-making authority.

Figure 1 - HR practices and employee participation Remark − Compiled by author

47

In essence, we argue that, for a highly skilled and motivated workforce to contribute maximally to firm performance, structures and processes must exist that allow the workforce to contribute. Thus, employee involvement/participation systems provide the workforce with the opportunity to share their knowledge, skills and behaviours (cultivated through HR practices) in ways that benefit the firm. Firms that do not at least allow for employees to contribute ideas and suggestions fail to take full advantage of the skills and motivation of the workforce. In fact, some support for this type of relationship was observed by MacDuffie in his study of lean production systems within the automobile industry. He distinguished between HRM policies (measured as recruitment and hiring, contingent compensation, status differentiation and training, i.e., the types of HR practices assessed in this study) and work systems (measured as work teams, problem-solving groups, employee suggestions made and implemented, job rotation and decentralization of quality-related tasks, i.e. similar to our variable of participation) [24]. His bundles of HRM practices were aimed at increasing the skills and motivation of the workforce. In addition, he argued that the impact of these bundles should be observed only when combined with a participative work system that allows employees to contribute discretionary effort. In fact, he stated: Innovative human resource practices are likely to contribute to improved economic performance only when three conditions are met: when employees possess knowledge and skills that managers lack; when employees are motivated to apply this skill and knowledge through discretionary effort; and when the firm's business or production strategy can only be achieved when employees contribute such discretionary effort, [24, p.199] Consistent with recent conceptualizations of the resource-based view of the firm, study supported the notion that HR practices can be used as levers through which firms develop a skilled and motivated workforce that can be a source of competitive advantage [2, р. 41]. Given Hansen findings that organizational resources (i.e. workforce characteristics) explain much more variance in firm performance than do industry conditions, these results imply that firms would benefit from investing in their employees through the strategic use of HR practices [55]. 48

In the contingency view, organizational and HR practices are not one-size-fits all, but rather elements that should be carefully tailored to a firm’s business strategy, stage of growth, technology, systems, processes, workforce demographics and power. The workforce must therefore be categorized and managed differently in line with the organization’s business strategy. This suggests that HR professionals play a key role in analyzing, categorizing and developing differentiated HR practices and ensuring their integration and alignment with the organization’s overall strategy. Satisfying these needs for effective selection, motivation and development requires a specialist set of skills that have been developed by HR professionals. There is growing empirical evidence that in a world where innovation, product quality and customer service are increasingly important for competitive advantage, employees are coming to be more valued and managed more professionally, and perhaps more strategically. Table 5 − Concepts explaining the role of HR practices in organizations Concept

Description

Authors

1 Resource-based view of the firm

2 HR practices can be used as levers through which firms develop a skilled and motivated workforce that can be a source Contingency view Of competitive advantage organizational and HR practices are not one-sizefits all, but rather elements that should be carefully tailored to a firm’s business strategy, stage of growth, technology, systems, processes, workforce demographics and power. The workforce must therefore be categorized and managed differently in line with the organization’s business strategy Remark - Compiled by author from sources [2,24, 26 ]

49

3 Wright et al.., 1994 Barney, 1991; Wemerfelt, 1984 MacDuffie (1995) (Snell, 1992). Youndt et al. (1996)

The influence of HRM on organizational outcomes has become an important topic of research starting in the 1990s. HRM attaches importance to the motivational aspect of organizational practices in the development and best utilization of human resources. Thus, we can define HRM as an integrated and planned development process for effective utilization of human resources for the achievement of organizational objectives. Mondy, Noe and Premeaux defined HRM as the utilization of individuals to achieve organizational objectives [77]. HRM involves the development of an individual’s abilities and attitudes in such a way that the individual is able to grow personally and contribute towards organizational interests. Noe, Hollenbeck, Gerhart and Wright defined HRM as referring to the policies, practices, and systems that influence employees’ behaviour, attitudes and performance [78]. However, the important thing is to define the boundary of HRM practices. Hornsby and Kuratko defined HRM practices in five major areas: job analysis and description, recruiting and selection, training, performance appraisal and compensation [79]. Huselid defined HRM practices as employee recruitment and selection procedures, compensation and performance management systems, employee involvement and employee training [80]. Jeffrey and Donald viewed HRM practices as job analysis, recruitment, selection, compensation, benefits, incentive, performance appraisal and training [81]. Mondy et al. thought the practices of HRM include five basic functions, including staffing, human resource development, compensation and benefits, safety and health, employee and labour relations and so on [77]. Pawan identified HRM practices as pay and reward, recruitment and selection, training and development, health and safety, and work expansion or reduction [82]. Pfeffer proposed sixteen interrelated practices characterize companies that achieve success through the way they manage people. Successful companies provide: − Employment security − Selectivity in recruiting − High wages − Emphasis on training and skill development − Sharing information − Symbolic egalitarianism 50

− Wage compression across levels and departments − Incentive compensation such as gainsharing, − pay for performance, and pay for skill − Employee ownership − Teams and job redesign − Cross-training and cross-utilization − Participation and empowerment − Promotion from within − Long-term perspective − Measurement to assess progress − Overarching vision or rationale [56] Pfeffer, Hatano, & Santalainen, discussed thirteen practices for managing people which are: 1. Employment security, 2. Selectivity in recruiting, 3. High wages, 4. Incentive pay, 5. Employee ownership, 6. Information sharing, 7. Participation and empowerment, 8. Self-managed teams, 9. Training and skill development, 10. Cross-utilization and crosstraining, 11. Symbolic egalitarianism. 12. Wage compression, and 13. Promotion from within [57, p. 55] Later Pfeffer (1998) reduced his original list of sixteen high performance work practices to seven: − employment security; − selective hiring of new personnel; − self-managed teams and decentralization of decision making as the basic principles of organizational design; − comparatively high compensation contingent on organizational performance; − extensive training; − reduced status distinctions and barriers, including dress, language, office arrangements, and wage differences across levels; − extensive sharing of financial and performance information throughout the organization [58] Delery and Doty also shortened Pfeffer’s 1994 list of proposed sixteen most effective practices for managing people to seven: − Internal career opportunities − Formal training systems − Appraisal measures − Profit sharing 51

− Employment security − Voice mechanisms − Job definition. [44,p. 802] Delery and Doty posit a set of practices that will work in most if not all firms. These researchers speculate that some HRM practices will be better than other practices and that these ‘best practices’ should be adopted by all firms. Besides the need for strategic integration of HR practices, researchers found that "certain HR practices blend better than others do, and it is sensible to select practices in conjunction with and not in isolation from each other" [44]. Table 6 −Human Resources practices Authors 1 Pfeffer 1994

Pfeffer, Hatano, & Santalainen

Pfeffer (1998)

HR practices 2 Employment security; Selectivity in recruiting; High wages; Emphasis on training and skill development; Sharing information; Symbolic egalitarianism Wage compression across levels and departments; Incentive compensation such as gainsharing; pay for performance, and pay for skill; Employee ownership Teams and job redesign; Cross-training and cross-utilization; Participation and empowerment; Promotion from within Long-term perspective; Measurement to assess progress; Overarching vision or rationale. Employment security; selectivity in recruiting; high wages; incentive pay; employee ownership; information sharing; participation and empowerment; self-managed teams; training and skill development; cross-utilization and cross-training; symbolic egalitarianism; wage compression; promotion from within. Employment security; selective hiring of new personnel; self-managed teams and decentralization of decision making as the basic principles of organizational

52

Continue of Table 6 1 Delery and Doty (1996)

2 Internal career opportunities; Formal training systems; Appraisal measures; Profit sharing; Employment security; Voice mechanisms; Job definition. Hornsby and Kuratko job analysis and description, recruiting and selection, training, performance appraisal and compensation Huselid employee recruitment and selection procedures, compensation and performance management systems, employee involvement and employee training Jeffrey and Donald job analysis, recruitment, selection, compensation, benefits, incentive, performance appraisal and training Mondy et al. staffing, human resource development, compensation and benefits, safety and health, employee and labour relations Pawan pay and reward, recruitment and selection, training and development, health and safety, and work expansion or reduction Remark - Compiled by author from sources: [4, 29, 44, 57, 58]

Consistent with above mentioned conceptualizations of the human resources practices we have developed a recommended model of HR policies and practices: 1. Staffing the organization’s HR need: Planning for Human Resource needs, recruitment, selection, adaptation. 2. Developing employees: training and development, Performance Appraisal, career development. 3. Retaining employees: compensation and rewarding, improving employees and the work environment, corporate social responsibility. Table 7 − Recommended configuration of Human Resources Management practices HRM policy Staffing the organization’s HR need

-

53

HRM practices HR planning recruitment selection adaptation

Continue of Table 7 1 Developing employees

Retaining employees

2 - training and development - Performance Appraisal - career development - compensation and rewarding - improving employees and the work environment - corporate social responsibility

Remark - Compiled by author

HR department in organization. All managers regardless of their functional area, their position in the hierarchy, and the size of the firm for which they work must effectively deal with HR issues because these issues are at the heart of being a good manager. The role of a company’s HR department is to support, not to supplant, managers’ HR responsibilities. For instance, the HR department may develop form to help managers measure the performance of subordinates, but it is the managers who conduct the actual evolution. The HR department is primarily responsible for helping the firm meet it business objectives by designing HR programs, but managers must carry out these programs. This means that every manager is a human resource manager. HR professionals need to know their organization’s business thoroughly- not only in terms of people, but also in terms of the economic, financial, environmental, and technological forces affecting it. Rather than playing a staff role, they should become internal consultants known for their expertise and ability to help solve HR problems faced by line managers. For the sake of the firm, managers and HR department need to work together closely. Unfortunately, lack of cooperation has traditionally been a problem, and even today it is not uncommon for managers and HR professionals to view each other negatively. Companies can take certain steps to foster an effective partnership between managers and HR department: − Analyze the people side of productivity rather than depend solely on technical solutions to problems. This requires that managers be trained in certain HR skills. It also requires encouraging 54

managers to value human resources as a key element in organizational effectiveness and performance. − View HR professionals as internal consultants who can provide valuable advice and support that improve the management of operations. − In other words, rather than thinking of the HR department as a group responsible for enforcing bureaucratic procedures, view it as a source of expertise capable of assisting managers in solving personnel-related problems, planning for the future, and improving utilization of productive capacity. − Instill a shared sense of common fate in the firm rather than a win / lose perspective among individual departments and units. This means developing incentives for managers and HR professionals to work together to achieve common goals. − Actively involve top corporate and divisional managers in formulating, implementing, and reviewing all HR plans and strategies in close collaboration with the HR department. − Require senior HR executives to participate on an equal basis with other key managers from the various functional areas (marketing, finance) involved in charting the enterprise’s strategic direction. Companies should also periodically conduct an HR audit to evaluate how effectively they are using their human resources. HR audit – a periodic review of the effectiveness with which a company uses its human resources. Frequently includes an evaluation of the HR department itself. The audit, which is typically conducted by the HR department, deals with broad set questions, including: − Is the turnover rate exceptionally low or high? − Are people quitting good employees who are frustrated in their present job, or are they marginal performers? − Is the firm receiving a high return on the money it spends on recruitment, training, and pay-for-performance plans? − Is the firm complying with government regulations? − How well is the company managing employee diversity? − Is the HR department providing the services that line managers need?

55

− Are HRM policies and procedures helping the firm accomplish its long-term goals?? 1.4. Training and organizational effectiveness Among the internal resources which can be considered sources of competitive advantage is the human element, mainly due to its intangible characteristics: knowledge, skills and attitudes and organizational knowledge are being given more and more significance. Although all practices of personnel management are implied in the development of these resources, training is the main activity in order to have qualified, flexible and well-prepared employees and to achieve the correct running of each stage of the process of knowledge management. Training is the process of making proficient through instruction and hands-on practice that is expected to be used in the performance of assigned duties. Research on employee training has stressed the impact of training on different types of outcomes. A popular distinction in what training may contribute is made in the four-level model of Kirkpatrick. This model distinguishes; (1) reaction criteria that represent attitudinal and affective responses to the training; (2) learning criteria, learning outcomes of the training without reference to the performance for which the training was meant; (3) behavioural criteria, actual on-the-job performance; and (4) results criteria, distal and macro criteria that relate to productivity and profits [59]. Overall, we expected training to have a positive effect on organizational effectiveness because raising the level of and range of workers’ competencies would imply a broader repertoire of behaviour that may be used in the organization to improve performance. A substantial number of studies indicate a positive relationship between HR interventions and organization level performance. The above studies indicate that the effects of training on organization productivity and profitability are less well researched than those examining the effect of training on trainees’ attributes (such as wages or mobility). We will discuss reasons why training may not yield the desired effect, and introduce training needs assessment and training utility

56

as concepts that may explain the effect of training on organizational effectiveness further. Training needs assessment (TNA). One of the reasons why training does not deliver the desired effect may be that it does not suit the needs of the organization. Although this seems a straightforward and simple idea, not much evidence is present in the literature to support it. Arthur et al. reported that only a few studies on training included a needs assessment (only 6% of all the data points in their meta-analysis) [60]. The studies that were conducted on needs assessment revealed positive effect sizes. However, these results do not relate to organizational effectiveness, but rather to criteria related to reactions, learning and behaviour of individuals in training. Traditionally, the ‘felt’ needs approach has been applied which simply asks employees to list the training they desire. Although these ‘felt’ training needs might boost morale, it is unlikely that they yield results at the business level because employees may report the training they want and it may differ from the training they really need. Guthrie and Schwoerer pointed out that self-assessed training needs can be systematically affected by factors other than actual need. For example, they found that respondents in later career stages reported lower training self efficacy, lower training utility and less need for management training [61]. Education and training needs, as opposed to a basic needs such as the need for food, are often difficult and complex things to understand – for example, looking at the list above, think how complex a set of needs are present in a person wanting to build self-awareness, self-confidence and motivation! A further complication is that people may not be aware that they are in need. Hence trainers often talk of four different types of educational and developmental needs: − felt − expressed − normative − comparative. Felt needs are the needs that people perceive themselves. Felt needs are often defined as being what people really want and that they consciously feel. However, felt needs are often likely to be constrained by what people perceive as being possible and available. 57

Employees are more likely to buy into training programmes if they are seen as meeting felt needs. Expressed needs are felt needs that are outwardly and publicly expressed or demanded. Sometimes, however, needs are expressed in less obvious ways, for example, if an employee feels his or her needs are not being met he or she may resign or ask to be transferred without clearly expressing or demanding the meeting of the needs in the current job situation. People may also express needs without really feeling that they are essential. Normative needs are those seen as desirable against an external standard proposed by the organization or institution and are sometimes expressed in formal standards. Such standards represent a minimum level of adequacy (as defined by the employer or authority). If employees are found are found below this standard they can be defined as being in need. Comparative needs are when individuals and organisations are compared with others. Those found to be lacking are then defined as being in need. This is similar to normative needs in that the needs are defined by employers or experts ‘from above’. The existence of these different types of needs raises important questions about who determines or ascertains training needs. Some of these questions include: − What role does the trainer play in determining the needs? − Do employees know what their needs are? − Do employees know what their needs are but are unable to articulate them? − Whose needs are most important? − If needs are accurately identified, does this mean that the trainer must meet them? One can immediately see what potential conflicts may arise in relation to needs. There may be conflicts between: − the needs of different individuals; − different institutional needs; − individual and institutional needs. Although self-assessment of training needs involves the risk of not identifying the actual need, it should be noted that the assessment by others does not guarantee that actual needs are identified better. Chiu, Thompson, Mak, and Lo’s conclusion of a 58

review of the literature was that 87% of the needs assessments were initiated by trainers, which may signify a supply-led approach to TNA. Also, other considerations may play a role in the choice for a specific training programme, for example based on subsidies given by governments, the compliance with a particular qualification framework, or legislative requirements. These reasons may differ from the true business needs of the employer [62]. A systematic approach to TNA includes at least the determination of job requirements, required skill levels and the current skill levels of the employees involved. Many case studies on TNA have been documented that demonstrate this. TNA models have not seen significant changes over the past 30 to 40 years, in terms of theory as well as practice. Several TNA models have been presented in the literature. In the following we describe the Organization-Task-Person (OTP) framework as a typical approach to TNA. Organization-Task-Person framework. The OTP three-level conception of needs assessment is considered the core framework for needs assessment in the academic literature, and most of the models developed since have been based on this three-level framework. The organizational analysis consists of considering how personnel training can help to attain organizational goals and where in the organization training is needed. The task analysis focuses on what the employee must learn in order to perform well in the job and, thus, what the training should cover. Person analysis identifies who, in the organization, will need training and for what purpose. A conscious and structured approach to training needs would in all likelihood help to increase the selection of training solutions that most closely relate to the organizational needs. It is likely that this will affect training utility. Training utility. Only if the relevant training needs are identified and addressed will training lead to the desired results. It is likely that some organizations attempt to solve their human performance problems through training without determining whether training was the answer to their problems in the first place. In extreme cases inadequate or incomplete training is even likely to promote performance deficiencies. Training should only be used as a solution 59

to human resource problems when the cause of these problems is a lack of competencies. After all, performance improvement may lie in other factors. Rummler and Brache suggested that 80% of the performance improvement opportunities reside in managing performance, by providing the adequate conditions in terms of input and output, feedback, performance consequences and so on. They suggested that only 15% to 20% of performance may be ascribed to the competency area [63]. A good TNA should highlight the issues that need to be addressed through training and distinguish these competency issues from the other factors affecting performance. We consider the perceived utility of training, as judged by those in charge of training, such as HR managers, to be the most important factor to affect organizational effectiveness. Only if training satisfies training needs can it be considered useful, and it is suggested that only when it is useful, will effectiveness result. Utility may be viewed from the perspective of the trainee and from the organization. Alliger, Tannenbaum, Bennett, Traver and Shotland distinguish between ‘affective’ and ‘utility’ judgements of training satisfaction. Affective judgements measure the extent to which the trainee ‘liked’ the different aspects of training. Utility judgments, on the other hand, reflect the extent to which trainees can apply the training subjects in their work. Alliger et al. showed that these utility judgements of trainees show modest but significant relationships to immediate learning and transfer. Of course there may be other factors that affect training outcomes in organizations. Here, we consider the size of the organization as an important influence [64]. Organization size and training effectiveness. Investment in training and training needs assessment may depend on the circumstances in which an organization operates. The availability of more resources increases the flexibility of larger organizations to take their staff off the job to undertake training. Moreover, large organizations tend to have HR departments and in-house trainers that are more involved with developing their human resources. Smaller organizations may conduct little formal evaluation of training needs. On the other hand, managers may still be as familiar, or even more familiar, with workers’ training needs because in small organizations, top management is likely to have more day-to-day contact with workers. Thus, training needs may be assessed 60

informally. However, smaller organizations tend not to have human resource development planning in place. Hence, their training decisions may be more ad hoc and reaction driven. Previous studies indeed showed that large establishments provide more training than their smaller counterparts. The comprehensiveness of the needs assessment is significantly and positively related to organizational effectiveness. This relation is partly mediated by the perceived utility of training. In other words, the alignment of the training programme with the organization’s training needs influences effectiveness, confirming earlier models and results. Only a partial mediation of utility was found in the relation between TNA and effectiveness; TNA contributed directly to effectiveness. There is no any (linear or nonlinear) relation between the size of an organization and the extent to which the organization invested in training hours, or on how comprehensive the TNA in the organization was. Nevertheless, comprehensive TNA and the utility of the programmes were associated with better organizational effectiveness. Training evaluation. The success of training depends on the correct execution of all steps of the process: previous analysis of training needs, development and implementation of an adequate training plan and evaluation. The existing literature proposes different models for carrying out training evaluation. The one that Kirkpatrick developed at the end of the 1950s, called the ‘Model of Four Levels’ or ‘Kirkpatrick’s Model’, 4 can be highlighted. This is the most widely used by organizations and the most widely referenced in studies about this subject due to its simple and practical ideas. This model includes four levels that evaluate respectively four aspects of training. The first level measures workers’ opinion and the degree of satisfaction with the training activity. This is the most frequently used type of evaluation due to the ease of performance and the lack of experience in the assessment of other levels. The second level corresponds to learning evaluation, that is, the extent to which workers have advanced in skills, knowledge or attitude after the training activity. It assesses whether the training action has been correctly expressed, whether the didactic aims have been achieved and to what extent. 61

The third level evaluates behaviour, focusing on the changes observed in performance after taking training activities. The fourth level evaluates the effects of training on business results: productivity increase, sales increase, cost reduction, quality improvement or decrease in absenteeism rates and labour turnover. According to Kirkpatrick, the fourth level is the most significant from the organization’s point of view, since it checks whether training has fulfilled its goals and whether organizational needs have been covered [59]. Other authors also recommend the evaluation of the impact of training on business results since training is considered an investment and, therefore, the company must check that the expected return surpasses the minimum necessary to justify training investment. Despite this fact, very few companies assess this fourth level, for different reasons. Among them, the difficulty and high costs of collecting and interpreting data at this level and the lack of clear and direct methods for measurement of results and comparison with the training action. A long-term perspective is also required, making the unambiguous establishment of cause–effect relationships difficult. The measurements of results usually refer to the whole organization or to a department; therefore, it is not easy to identify the effects on just one individual or a specific group. Finally, training is just one of a series of factors affecting organizational performance. Even Kirkpatrick highlights the complexity of training evaluation at the fourth level, but he does not provide techniques for its performance. He just suggests going down one or two levels in order to evaluate changes in behaviour, learning or both (he even proposes using a positive result from satisfaction questionnaires as a basis), but this does not seem an acceptable solution [59]. Other training evaluation models are also proposed in the literature, although most of them build on Kirkpatrick’s. Some authors divide the fourth level into two different ones, proposing models with five evaluation levels. Hamblin’s model follows this pattern. He suggests a fourth level named ‘organization’, which tries to identify those improvements in terms of productivity, quality or employees’ moral that are due to training. The fifth level, ‘ultimate value’, would be measured as the effect of training on overall organization performance in terms of profitability, survival or growth [65]. Kaufman and Keller also 62

describe a five-level model. Their fourth level evaluates the contribution of training to the benefits achieved by the company, and the fifth evaluates the impact on society. The fourth level of Phillips’ model measures results achieved by the organization, like quality or customer satisfaction, while the fifth compares costs and benefits (ROI calculation) [66]. Although training provides many advantages to the company (economic, social and personal), the precise estimation of its monetary effects is not possible in many cases. Hamblin and Phillips, propose the division of Kirkpatrick’s fourth level into two, distinguishing two results’ measurements: effectiveness of the company and profitability. Only the translation of costs into economic terms is needed for assessing effectiveness. Therefore, this procedure is applied to those cases where it is difficult or impossible to express training benefits, although identifiable, in monetary terms. This analysis tries to evaluate those effects of training on the company that are significant but very difficult to quantify. It could be also used for comparing training programmes with the same goals but different methods, and for comparing the effectiveness of one action carried out several times in order to measure the influence of specific modifications. The estimation of training profitability is applied to those cases where costs and benefits can be quantified in monetary terms. This analysis allows the comparison of training programmes with different goals in order to give priority to certain training activities. It can be also used for comparing the results of workers under training with those of the control group in order to decide the allocation of available resources. It is worth mentioning that, although there are positive effects of training on organizational results, there is no clear cost-benefit relationship allowing the assessment of training effectiveness or profitability. However, the fact that very little research has been carried out about this area must be pointed out. One reason for this situation is the difficulty in finding a reliable indicator of training incidence, a fact even more complicated due to the existence of returns that are not only tangible, but also intangible. The heterogeneity of criteria among authors when evaluating these effects must be also added to this complex situation. These studies have not found a reliable 63

measurement of returns on training, but they have revealed very interesting conclusions. As a general rule, training has a positive effect on productivity, quality, staff turnover and financial results. The studies on the effects of the combination of human resource practices show that training, together with other activities positively affects results and is associated with a productivity increase and a staff turnover decrease. Likewise, different types of training have different effects on business results. The final point, worth emphasizing, is that very few articles express results in monetary units. This contrasts with the present increase of pressure on organizational goals, which means that the company needs to identify and measure its results in this way. The study of bivariate correlations shows the existence of some associations between training activities and business results; although not all training variables are related to the same result measurements. Among the methods applied, on-the-job training and training inside the company with in-house trainers can be highlighted since they are positively related to most effectiveness and profitability measurements. On the one hand, training inside the company with outside trainers shows a positive correlation only to involvement and quality; on the other hand, short outside courses show a negative effect regarding profitability. Contrary to expectation, the less planned training activities are, the better the human resource and quality indicators. It is worth mentioning that training activities carried out are significantly related only to effectiveness, but not to profitability. Business policy and management, market knowledge, group working and job safety are the activities with a highest number of significant relationships, and they are all positive. Finally, the few significant correlations found between the variables ‘effort in training’ and ‘results’ must be mentioned. Next, the results of the regression analysis are commented on. Results are divided into those using effectiveness as dependent variable and those related to profitability. Regarding effectiveness, the fact that on-the-job training given by in-house trainers is the method with the highest positive influence on results must be highlighted. This positive effect on the indicators of human resources, quality and productivity of the firm can be due to the fact that this kind of training presents less transference problems: it does 64

not interrupt the work; it develops the workers’ precise skills and promotes an environment of learning. In general, in-house training has a positive effect, while training outside the firm, like short external courses or distance training, usually shows a negative impact, especially on human resource indicators, maybe due to the fact that employees are less committed to and, therefore, less involved in the external training. Likewise, when training activities aim to transmit specific skills, there is an improvement in the indicators of firm quality and productivity. Obviously, workforce specialization decreases the error rate in the job and increases effectiveness, although it involves renouncing flexibility. Paradoxically, when the company sets up isolated training activities, there is a positive impact on productivity. This contradicts the conclusions obtained in the theoretical review, and it probably indicates that the lack of planning is not a problem in the short term. The effects of training activities are different depending on the dimension they are related to. Activities related to safety on the job and business policy and management can be pointed out due to their positive effect on several dimensions. Regarding how the effort in training carried out by the firm affects the results, it can be observed that the employees’ involvement is increased when employees act as trainers. This may be due to the fact that the establishment of a teacher–learner relationship, instead of the traditional superior-underling relation, improves the relationships with workmates, creates a more favourable disposition to the teamwork and increases employees’ motivation and commitment (both teacher’s and learner’s) to the firm. An increase in training hours per employee, however, has a negative impact on involvement. There are two possible explanations: 1) that the employee is, at first, stimulated to transfer all he learns, but, when training is intensified and a greater effort is needed, he loses interest; 2) the increase in the number of training hours implies an excessive interruption of work. The negative effect of the percentage of subsidized expenditure must be also emphasized. Increase in the proportion of expenditure that is subsidized has a negative impact on quality. This could be due, on the one hand, to the fact that firms do not pay attention to training when they do not pay it, and, therefore, they could be 65

undertaking activities that do not meet their needs. On the other hand, the negative impact could be due to the fact that the company asks for grants particularly in crisis moments when results are generally worse. It can be also highlighted that higher training expenditure is translated into a productivity increase. The final point worth emphasizing is that the higher the competitiveness the company faces, the higher the training effectiveness in terms of quality and HR indicators of improvement. Training profitability. As far as profitability is concerned, and regarding training methods, there is a similar trend to that obtained when talking about effectiveness. Thus, while training inside the company (on-the-job with external or internal trainers) positively affects the sales volume, benefit before taxes and profitability, training outside the company (like leave for participating in training activities or distance training) usually has a negative impact. This can be due, among other reasons, to the flexibility of working hours required by the employee and the need to substitute for him, to the fact that the activities are standard training activities for the whole market, which are not suited to the firm’s needs, to the fact that the competencies acquired outside the company are easily forgotten if they are not immediately employed or to the difficulties choosing the right courses among the great existing variety. Consistent with the theoretical review, which establishes that training must be planned to be successful, and in contradiction to the results obtained for effectiveness, training activities developed in isolation, that is, not within a plan, affect sales negatively. It can be also observed that the transmission of specific skills results in a sales increase. As has previously been mentioned, the most skilled employees do much more work and with a higher quality, which is, therefore, translated into an increase of the company sales. An aspect not significantly affecting effectiveness, but which positively affects benefit and profitability is co-operation in training with other companies. This can be due to a cost sharing or to the fact that a company benefits from the others’ experience. It must be mentioned that the contents of training activities have a virtually null incidence of effect on business results. As regards the variables of training effort, the expenditure on training negatively affects sales and benefit, that is to say, the more the resources dedicated, the 66

worse the results. This may be due to the delayed effects. When training activities are implemented, their costs are higher than the benefits, which are later generated over some years. The increase in training hours during working hours implies an increase in the benefit before taxes, maybe due to the fact that employees prefer to take advantage of training provided during working hours rather than to make an additional effort outside the workday, or to the fact that the training outside the company implies higher costs mainly because employees do not participate in the activities unless those hours are paid as overtime hours. On the other side, an increase in the percentage of trained workers positively affects the sales volume. As it was also observed when analysing effectiveness, an increase in the percentage of the expenditure on training that is subsidized has a negative impact on profitability. Finally, an increase in the average number of training hours received by an employee causes a decrease in the sales, maybe due to the reduction in the number of working hours. 1.5. Strategic Human Resource Management concepts Today, economic development, science achievements as well as new technologies development, including IT, is rather dynamic and unpredictable. Globalization process, world economic and political integration reached high level of the interdependence of the states across the world. These new challenges demand new attitude and new approaches to the business development, including development of Strategic Human Resources Management (hereafter, SHRM). Modern studies in the field of Strategic Human Resources Management theory brought academics and practitioners to some interesting and very important results that found their substantiation in business practices. The premise, research, and practice of Human Resource Management (HRM) has evolved significantly over the past half-century, and undergone a revolution in form and purpose primarily within the past 25 year. Spurred on by a considerable amount internal and external environmental forces driving change, HRM has evolved from a mainly a personnel function, with minimal financial impact, to what many academics and practitioners today regard as the sole source of Sustainable Competitive Advantage (hereafter, SCA) for businesses operating in 67

a global economy [2, р.102]. These authors have drawn on the Resource Based View (hereafter, RBV) of the firm and have argued that the traditional sources of competitive advantage are no longer capable of creating value the way that intangible assets such as human capital are able. The human resources value creation process is so complex and dependent on social and cultural company norms embedded in the firm that it becomes nearly impossible to imitate. However, there has been extensive discussion over whether human resource practices can provide SCA. Additionally, individual worker performance can also impact a firm’s SCA. Wright & Snell, noted that “studies have yet to test empirically whether human resource practices are path dependent, causally ambiguous, or imitable” [42]. Likewise, there is a lack of substantiation that human resource practices affect the skills and behavior of employees, or that these factors are linked to improved performance. Strategic human resource management is a relatively new field in business theory. Deemed to be a “macro-oriented approach” of human resource management, SHRM is an outline of human resource allocation to meet the firm’s needs. Wright & McMahan define SHRM as “the pattern of planned human resource deployments and activities intended to enable an organization to achieve its goals”[41]. Theoretically, SHRM focuses on the nature of human resources and management decision impacting a company’s human capital. Strategic and non-strategic frameworks of HRM represent potential beginning points for emergent theoretical models for SHRM, which include RBV. Definitions of Strategic Human Resource Management. Several different definitions of SHRM have emerged over the past several years. A collection of definitions of SHRM is presented in Table 1-8, which reveals considerable disagreement among academicians as to what constitutes SHRM. While some definitions clearly advocate a reactive role for HRM, others perceive a reciprocal or fully integrated relationship between HR and Business strategy. However, these authors agree that these definitions include the subsystems that compose the HRM function: staffing, training and development, performance appraisal, rewards and industrial labor relations.

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Table 8 − Definitions of Strategic Human Resource Management Author(s) 1 Beer, Spector, Lawrence, Quinn, Mills & Walton (1984:4) Craft (1988:72)

SHRM Definition 2 The development of all aspects of an organizational context so that they will encourage and direct managerial behavior with regard to people

The set of priorities a firm uses to align available or potentially available resources and its personnel policies and programs with its strategic business plan. Dyer (1984:159) The pattern that emerges from a stream of important decisions about the management of human resources, especially those decision that indicate management’s major goals and the means that (are) used to pursue them. Miller (1987:352) Those decisions and actions which concern the management of employees at all levels in the business and which are related to the implementation of strategies directed toward creating and sustaining competitive advantage. Schuler (1992:19) A set of processes and activities to ensure that HR management is fully integrated with the strategy and strategic needs of the firm, and that HR policy cohere both across policy areas and across hierarchies. Schuler, Walker Set of processes and activities jointly shared by human (1990:7) resources and line managers to solve people-related business problems. Wright, McMahan The pattern of planned human resource deployments and (1992:298) activities intended to enable an organization to achieve its goals. Remark - Compiled by author from sources: [11, 20, 68, 69]

Theoretical Foundations of Strategic Human Resource Management. A compelling reason for viewing HRM in a more macro perspective is the need to advance the degree to which the field has a strong theoretical base that can be scientifically validated. As Mahoney and Deckop lamented, the field of HRM has long been a theoretical in nature [67]. Further, this problem has become perpetuated by treating each subsystem of HRM as a separate entity. Dyer argued that a common theoretical framework may emerge if scholars were forced to view all of the subsystems of HRM together (e.g., bundling) [68].

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Realizing that the lack of a theoretical foundation could undermine the ability of both practitioners and researchers to use human resources to support the firm's strategy, Wright and McMahan attempted to advance theory development in this field by discussing six different models that are useful to understand strategic and non-strategic determinants of HR practices [69]. Their theoretical models are summarized in Table 9. Table 9 − Theoretical Models of Strategic Human Resource Management Theory 1 Resource-based view

Behavioral perspective

Cybernetic systems

Agency/ Transaction Cost Theory

Description 2 When the human resource (i) adds value to the firm, (ii) is unique or rare among current or potential competitors, (iii) is imperfectly imitable, and (iv) cannot be substituted with another resource by competing firms, it is said to provide sustained competitive advantages to the firm Employee behavior is a mediator between strategy firm performance. The differences in role behaviors required by the organization’s strategy require different HRM practices to elicit and reinforce those behaviors Organizations can best be described as input (KSAs), throughput (HR behaviors) and output (Performance) systems involved in transactions with a surrounding environment This identifies the environmental factors that

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Author(s) 3 Schuler & MacMillan (1984); Ulrich (1991); Wright, McMahan, McCormick & Sherman (1992)

Schuler & Jackson (1987a, 1987b, 1989)

Snell (1992)

Jones & Hill (1988)

Continue of Table 9 1

2 3 together with a set of related human factors explain why organizations seek to internalize transactions as a means of reducing the costs associated with these transactions Resource dependence The model assumes that Pfeffer & Cohen, Model all organization depend (1984); Smith-Cook & on a flow of valuable re- Ferris (1986) sources like money and skills into the organization to continue functioning, and the ability to exercise control over any of these valued resources provides an individual with an important source of power Institutionalization This involves the proLawler & Mohrman cesses by which social (1987) processes, obligations, or actualities come to take on a rule like status in social through and action Remark - Compiled by author from sources: [11, 20, 68, 69]

A resource-based view of the firm has earned considerable traction in strategic management literature, and merits further attention for two reasons: (a) the theory focuses on an internal analysis of the firm providing an extremely important avenue for SHRM researchers to examine ways to develop human resources as a source of competitive advantage, and (b) a resourcebased approach provides a framework for examining the pool of human resources that may or may not be able to carry out a given strategy during the formulation phase of strategic management. Sustained competitive advantage is possible if the organization

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possesses imperfectly imitable resources including human capital, technical expertise, and marketing skills [2]. Integrative Models of Strategic Human Resource Management. Lengnick-Hall and Lengnick-Hall reviewed SHRM research in four major areas–human resource valuation, human resource planning, responses to environmental changes, and matching human resources to organizational strategies – and observed four common characteristics among the literature. They found that SHRM models emphasized implementation over strategy formulation. The focus was on linking people to strategy, but not on linking strategy to people. They also observed that many models rely too heavily on organization or product life cycles as single and uncontrollable catalysts of change. This view is rather deterministic especially given that organizations can actively shape their own environments. Lengnick-Hall and Lengnick-Hall also observed that the current models lay too much emphasis on achieving fit, and do not acknowledge the necessity for lack of fit during organizational transformations [70]. Ferris, G. R., Hochwarter, W. A., Buckley, M. R., Harrell-Cook, G. & Frink, D. D. brought to the forefront the role of the human resource function in formulating and implementing strategic responses to decline [71]. They argued that such responses must be formulated within the context of the skills and knowledge available to the organization and according to the type of environmental conditions encountered. Making use of the typology of environmental decline proposed by Cameron and Zammuto, they identified the HR strategy and primary human resources issues facing the managers during periods of erosion, contraction, dissolution, and collapse. For example, they noted that during erosion, the problem facing the HR manager is one of “sharpening the pool of organization competencies.” Recruiting “new blood,” involving employees, and emphasizing efficiency in all operations has become part of the key tasks of all management and executives [72]. The Integrative Approaches to Strategic Human Resource Management are summarized in Table10.

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Table 10 − Integrative Approaches to Strategic Human Resource Management Authors 1 Baird & Meshoulam (1988)

DeSarbo (2003)

Dyer (1984)

Dyer & Holder (1988)

Ferris, Schellenberg & Zammuto (1984)

Galbraith & Nathanson (1978)

Lengnick-Hall & Lengnick-Hall (1988)

Miles & Snow

Contribution 2 Proposed a model for developing and implementing HRM strategies incorporating both an external fit with the developmental stage of the organization, and an internal fit among the components of HRM. The Human Resource Strategic Matrix crossing the five stages–initiation, functional growth, controlled growth, functional integration and strategic integration–and six HRM components– manager awareness, management of the function, portfolio of programs, information technology, personnel skills and awareness of the environment–can assist in drawing the HRM profile of an organization. Broadened Miles and Snow’s (1978) strategic choice model (Defender, Prospectors and Analyzers) to include firm capabilities and environmental uncertainty as precursors to identifying a particular strategic path. Delineated an approach for conducting research in human resource strategy (HRS); defined the contents of HR strategy in terms of goals and means, and stressed the importance of examining the effects of HRS on organizational outcomes. Proposed a comprehensive HRS typology consisting of three strategic types–inducement, investment and involvement. The strategies are identified in terms of HRM goals and means. The proposed typology is linked to organizational characteristics and the external environment. Suggested a menu of HRM practices during periods of decline; using the typology of environmental decline developed by Cameron and Zammuto (1985), they suggest specific HRM strategy and practices during Erosion, Contraction, Dissolution and Collapse. Linked HRM practices with respect to selection, appraisal, rewards and development to organizational strategy and structure. Stressed the importance of congruence or fit within HRM subsystems and between strategy. Based on an extensive review of literature, developed a four-cell typology of SHRM. The two dimensions, corporate growth expectations and organizational readiness, capture the basic features of their typology. The four HR strategies are Expansion, Development, Productivity and Redirection. Described three distinct human resource strategies–

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Continue of Table 10 1 (1984)

2 building, acquiring and allocating human resources–that correspond to their three strategic types–Defenders, Prospectors and Analyzers. Walton (1985) Described the new Commitment model of HRM and contrasted it with the traditional Control model. As his hypothesis is that these two models represent two end of the development continuum, organizations transforming from the control to commitment model are identified to be in the transitional stage of HRM development. Remark - Compiled by author from sources: [70, 71, 72, 73]

Miles and Snow extended their earlier work on strategic types by describing the HRM system and specific HR practices of Defender, Prospector and Analyzer firms. Defenders focus on building human resources, Prospectors on acquiring human resources and Analyzer on allocating human resources. They suggested that Defenders would emphasize early career entry, offer skill building, frequent training programs, adopt process-oriented procedures for appraisal, and set pay plans based on position in organization hierarchy. Prospectors usually hire from outside using sophisticated selection procedures, offer informal training programs, and compensate employees on the basis of employee performance. While Miles and Snow’s typology has enjoyed wide ranging appeal and been embraced in both management and marketing literatures for decades, there remains some concern about the role that other strategic choice factors play–such as environmental uncertainty and firm capabilities–in the formulation of a more comprehensive and inclusive typology [73]. Hambrick provided a specific example in which the omission of industry and environmental peculiarities in the formulation of the typology implies that strategy is absolute and constant–instead of applying a more contingency-based approach that seeks to align strategic type with a firm’s environment. Further analysis of Miles and Snow’s strategic typology by Conant et al. revealed another important, yet previously missing component. Firm capabilities, described as “complex bundles of skills and accumulated knowledge that enable firms to coordinate 74

activities and make use of their assets to create economic value and sustain competitive advantage”[73], is thought to have implications for future research as a means of exploring relationships within and among the strategic context. Dyer and Holder, based on their observations of HR practices at several corporations, identified three HR strategic types that are comprehensive, yet parsimonious. Their typology was not intended to capture just the content of HR strategic decisions, but also the underlying philosophical considerations that are major determinants of HR strategies. Three HR strategies–inducement, investment and involvement are described in the following section. Dyer and Holder identified three distinct types of HR strategy: inducement, investment and involvement. The strategic content is defined by how organizations establish the HR goals and objectives, and decide the means by which to achieve them. Four types of goals were identified by Dyer and Holder: contribution, composition, competence and commitment. Dyer and Holder also identified eight major ways of reaching strategic goals: staffing, development, rewards, work system, supervision, employee relations, labor relations and government relations. The following described the three HR strategy types [74]. Inducement. This strategy is based on the concept of motivation through rewards and punishments. Organizations following this HR strategy compete largely on the basis of low prices and/or the quality of their products. An inducement organization would develop high performance standards, low head count, and located employees with adequate skills and competencies. These organizations encourage very high levels of reliable role behavior. Jobs tend to be narrowly defined and work standards tightly controlled. Supervision is directive and career management and employee development receive little emphasis. Investment. Organizations that follow this HR strategy place a premium on the long-term education and training of employees and often take on a paternalistic family persona. These organizations usually compete on the basis of product or service differentiation rather than price and use cutting-edge technologies. An investment organization develops high performance standards and expects employees to demonstrate a moderate amount of initiative and 75

creativity in carrying out their tasks. These firms place considerable emphasis on career management and employee development and their dominant values are personal growth, respect, equity, justice, and security, instead of autonomy and involvement. Involvement. One of the major goals of involvement strategy is to achieve a very high level of employee commitment. Employees are motivated by the stimulation of autonomy, responsibility, variety, and being able to see their contribution to the final product, service or result of the work. Organizations following this strategy compete either on the basis of low price and high quality or on the basis of continuous innovation to provide differentiated products and services. The employees are expected to exercise considerable initiative and creativity, as well as to display a high degree of flexibility in adapting to rapid organizational chance. Semi-autonomous groups and self-managed teams are the building blocks of the work system, and supervision is facilitative and minimal. Employees at all levels are trained and the emphasis is on developing interpersonal and group facilitation skills, rather than more traditional job skills and knowledge. Involvement organizations attract and employ highly skilled people. Evaluation of Human Resources Strategies. Becker and Huselid propose a 7-step framework for measuring human resource strategies which is a culmination of their decade-long research of HRM practices and performance. By following the proposed 7-step process an organization can reach the top of the HR pyramid. Step 1: Clearly Define Business Strategy. Step 2: Build a Business Case for Why and How HR Matters for Strategy Implementation. Step 3: Build a Strategy Map Describing the Causal Flow of Strategy Implementation. Step 4. Link HR Architecture to Strategy Map. Step 5: Design HR System in Alignment with HR Deliverables. Step 6: Design HR Strategic Measurement System (The HR Scorecard) strategic results. Step 7: Implement Management by Measurement [75].

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The current status of theory on valuating the HR function is “in its infancy and is seriously hampered” [75]. It may be such a complicated concept and influenced by so many intervening variables that it does not get fully developed for some time. However, several studies have posited that there is a positive link between human resource practices and firm performance. In Becker and Gerhart’s research, influential HR practices were designated as “best practices” [5]. The best practices approach attempts to identify efficient and effective HR practices through benchmarking among firms. For example, a company may compare selection processes, benefit packages, training, compensation, and employee relations practices, and package those exhibiting appropriate internal fit. In a 1996 study on the impact of human resource management practices on perceptions of organizational performance Delaney and Huselid investigated for-profit and nonprofit firms to determine if positive associations exist between human resource management practices, such as staffing selection, training and incentive compensation, and firm performance measures[23]. In general the findings supported the view that progressive human resource management practices are positively related to perceptual measures of firm performance. The results did not sustain the premise that complementarities among human resource management practices positively augment firm outcome. Never the less, the authors believe the improvement of reliable and valid measures of forward looking human resource practices and synergies remains a vital matter for researchers to explore. A similar study was conducted by Huselid, Jackson and Schuler using publicly available financial data as measures of firm performance. The results support the hypothesis that investments in human resources are a potential source of competitive advantage, however the authors conclude there is still very little understanding of the processes used to achieve this potential or the conditions under which it is realized [11, 29]. In addition to the empirical studies aforementioned, several authors have proposed conceptual and theoretical frameworks for further exploring this important topic. Wright and Snell presented a framework that provides a theoretical foundation for understanding the dual roles of both fitting the HR system to the 77

strategic needs of the firm and building the system so as to enable a flexibility in response to a variety strategic requirements over time. The authors contend that firms should promote simultaneously both fit and flexibility in SHRM to create a SCA [42]. Human resources have the potential in each organization to become a competitive advantage. Becker and Gerhart suggest that the following should be done to solidify the conceptual and practical realm of SHRM: 1) HR best practices need to be determined. 2) More qualitative research needs to be conducted. 3) The current theory needs to be built on and tested; not just more theories developed. Accumulative body of knowledge needs to be developed 4) A careful focus on what kind of statistical analysis needs to be done; with an emphasis on how should HR be measured 5) More robust and valid findings need to be produced and a more complete structural model needs to be developed 6) A focus on policy implications needs to be addressed with answers to the question of “why won't business listen to us” [5]. In summation, the HRM literature emphasizes the importance of human capital in enhancing firm performance or even creating competitive advantage. The current state of SHRM is at a junction in the area of theory development and has the possibility to create an important new understanding of its involvement in the improvement of organizational systems. According to Becker and Gerhart the existing theory needs to be built on and tested not just more theories produced and this should be accomplished with new qualitative research; best practices need to be determined. There is considerable evidence in the literature that supports the notion of differences across business strategies and HRM practices. Much less evidence has been found related to strategy, HRM and performance. Many studies detail a reactive role for HRM and are content to describe the differences across different business strategies. As Dyer asserted, it is of greater benefit to the field if researchers can identify the difference that makes a difference. Theoretical models of human resources management strategies described above were sufficiently relevant to the economic situation

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of that time. The academics designed them couldn’t even assume today’s scenario of world economic development. Proposition 1: today it is necessary to adapt theoretical approaches in accordance with nowadays economic situation or design new theoretical approaches to the problem of human resources management strategies answering to up-to-date realities. Broken out world financial and then economic crises had ended the period of quiet enough and smooth development of business, including its human resource management part. The crises raised new problems for business starting with number of personnel and concluding with a set of problems on human resource management. The next important aspect of world current economic development is its extremely high technology level, first of all IT which dynamic development had changed the balance of different sources of Sustainable Competitive Advantage (tangible and intangible assets, finance and natural resources, human capital and so on).The recent science achievements combined with perspectives of IT led to “innovative approach” in development economy that also added to the significantly changes in configuration and balance sources of Sustainable Competitive Advantage. Today states and governments leaders across the world link economic development and prosperity of their countries with successful designing and implementation of the new high technologies, innovative development of their economies. Now it is obvious enough that balance of sources of Sustainable Competitive Advantage is changing and they are seriously regrouping from traditional sources to human capital. It could be said that along with financial and tangible investments modern business needs in human capital investments. The modern high technologies demand significantly more investments in human capital, rather than in material or financial. Proposition 2: it could be assumed that subsystems that compose the HRM function: staffing, training and development, performance appraisal, rewards and industrial labor relations – also have to suffer changes in accordance with changing human resource management strategy place and role in business development process. The given above definition of human resource management strategy reflects the human resource management strategy concept. Current economic development logic insist on regarding human resource management 79

strategy not like a subordinated part of the general business strategy of the company, but as a self-consistent human resource management strategy of this or another business. In the new economic conditions they are both equal worth strategies. Moreover, in some fields of economy the human resource management strategy even takes over business strategy definition. Chapter summation Despite the growing interest in HRM by management scholars and the increasing rigor applied to research on this topic, HRM as a theoretical concept is still in its relative infancy. Ferris and King noted that “historically, scientific inquiry in HRM has been decidedly micro-oriented, tending to adopt a psychological perspective and proceeding at the individual level of analysis.” [76, p.10]. While suggestions have been made that adopting an organizational perspective might help to effectively advance theory and research in HRM, there has been little attempt to provide a critical evaluation and integration of such work. One glaring inadequacy of the field is the lack of a strong theoretical basis for viewing the HRM practices within the larger organization. This inadequacy extends to the area of SHRM. Perhaps it is not too surprising given the theoretical linkages with the ambiguous nature of the concept business strategy. As previously illustrated, there is very little agreement among researchers about the definition of SHRM. Although the vast majority of these conceptual models and frameworks have been used in past research to identify linkages between HR practices and business strategy, certain themes have emerged from past research with enough regularity to begin developing a comprehensive model of SHRM. Due to the applied nature of SHRM, it is very important that the field use theoretical models that allow for both understanding and predicting the effects of HR practices on organizational outcomes. Many writers in the field have adopted a systems perspective, which incorporates HRM within broader organizational systems, affected both by external and internal considerations which alters our perspective about what constitutes effective human resource management.

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Following these considerations, three main research gaps emerge in the literature. First, considering the lack of consensus on the definition of SHRM, there is a need for greater clarity in the domain and operationalization of the concept. Second, consideration to adapt theoretical approaches in accordance with nowadays economic situation or design new theoretical approaches to the problem of human resources management strategies answering to up-to-date realities. Third, considering the lack of a strong theoretical basis for viewing the HRM practices it is very important that the researches develop theoretical-methodical models that allow for both understanding and predicting the effects of HR practices on organizational outcomes. The objective of this research is to address these gaps in the literature and, thus, advance research on HR practices and SHRM in the context of Oil and Gas industry of Kazakhstan

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2 HUMAN RESOURCES MANAGEMENT PRACTICES IN OIL AND GAS INDUSTRY OF KAZAKHSTAN 2.1. Socio-economic background of Joint-Stock Company “KazTransGas” Today’s economic environment is dynamic and stability today may become uncertainty tomorrow. Facing this situation, companies need to manage effectively all resources. Traditionally, product technology and process, accessible capital sources, finance and so on, were essential to win the game; however, at present, these kinds of resources, suggested by Pfeffer, fail to fulfil their roles to defeat competitors. The decreased vitality of those resources has drawn practitioners and academics’ attentions to explore other types of assets which can capture and retain competitive advantage and at the same time, are not easily imitated and copied by competitors. The question of the kind of asset that can provide sustainability, competitive advantage, and superior performance has been asked and discussed among managers and scholars over the past decades. As a result, the finding of human resources as a valuable intangible asset of an organization was the unequivocal answer to clarify all doubts on how organizations could compete in the market, achieve superior performance, realize competitive advantage, and improve organizational performance over a very long time. The primary objective of this chapter is to analyse integrating HRM practices in JSC “KazTransGas” (JS KTG) and compare with the benchmark models proposed in the literature. Oil and Gas industry of Kazakhstan has long been regarded as a symbol of national strength. Since the Oil and Gas industry is closely related to economic stability and national development, it can be considered as a national strategic industry of Kazakhstan. National Company “KazMunayGas” improved the financial performance of its production activities in 2010. The volume of oil and gascondensate production amounted to almost 22 million tons. The company’s share in the country's liquid hydrocarbons production volume grew to 28 percent. The company’s total profit raised almost 82

threefold, the financial soundness improved. The company remains one of the principle sources for recharging the state budget. The KazMunayGas group of companies accounts for 2.9 billion dollars in taxes and payments to the budget of the republic. This is a quarter of the state budget revenues and almost a third of all tax revenues of the budget. The National Fund of the republic is 70 percent formed using the receipts from the group [85]. The Joint Stock Company KazTransGas is the largest gas supply company in the Republic of Kazakhstan, which represents state interests in the gas markets of the country and the world. The sole shareholder is the SC National Company KazMunayGas. KazTransGas controls the transportation of natural gas through cross-country pipelines, sells gas to domestic and foreign markets, and develops finances, builds and operates pipelines and gas storage facilities. During the reporting period, the KazTransGas group of companies consisted of 5 subsidiaries and affiliated companies, which are represented in the following business areas: Trunk transportation. JSC "Intergas Central Asia", LLC "The Asian Gas Pipeline" LLC, "The pipeline Beineu-Shymkent", LLC "KyrKazGaz”. Gas supply. JSC "KazTransGas Aimak", JSC " KazTransGasAlmaty", LLC “KazTransGas-Tbilisi” LLC resource base. "AmangeldyGaz". Gas commercialization sector. Represented by LLC "KazTrans Gas LNG» (at the end of 2010 registered as "KazTransGas Onimderi), Samruk-Energo (5,98%), BMG AG (50%). Support activities. Intergas Finance BV, Intergas International BV, PU Corporate University SK, LLC GazInServis. Brief historical review. At the end of 1991, alongside with general changes in the structure of the state management of the republic, transformations took place in the management of Kazakhstan’s energy sector. The industry has passed under the jurisdiction of the Ministry of energy and electrification of the Republic of Kazakhstan (RK) and the State committee of the RK on geology and subsoil protection It was obvious at the beginning of 90s of last century that great discoveries capable of the dramatic increasing of the amount of prepared oil and gas reserves in the 83

republic are possible only with the development of Caspian Sea water area. During the Soviet period this territory had been covered twice with marine geophysical investigations. At the time of sea surface reduction due to the fall of stage, at the areas opened from sea water the search and detailed geophysical works were conducted. Land geophysical investigations at the significant part of the sea territory, occupied with shallow water, were conducted. By complex result interpretation of these investigations the largescale structures were determined, what corresponds with the contour of present Karashagan, Central, Kurmangazin, South-Ghambai structure groups. For the first time they were reflected on the summary structure map of Caspian depression on the reflecting surface P2, drawn in «Kazgeofizika» association at the end of 80s of XX century. In 1993 these maps were improved and issued in the form of an Atlas together with French company CGG. In the explanatory note to the Atlas the high prospects of marked structures were made. The Atlas of maps was approved by the Ministry of Geology of RK, further copied and sold to the foreign petroleum companies, including JSC «Kazakhstankaspiyshelf» intended to work in Kazakhstan. In 1988-1989 these materials were considered in the USSR Gosplan and the whole region was referred to the area of the USSR strategic reserves. On December 1992 Kazakhstan announced to the world about the intention to conduct search works on Caspian Sea. At the second half of this year the group of Kazakhstanian specialists developed «The State program of the development of Kazakhstan sector of Caspian sea». By the Resolution of the Government of RK No. 97 of 13 February 1993 the state company «Kazakhstankaspiyshelf» was established for the realization of the work program of the geological and geophysical investigation and oil-gas fields’ development in Caspian water area. December 3, 1993 the Government of RK signed the international agreement with foreign companies SHELL (Holland), STATOIL (Norway), MOBIL (the USA), BP (England), TOTAL (France), AGIP (Italy) on the creation of the international consortium, where SC «Kazakhstankaspiyshelf» was the operator, and Marabaev G.N. was appointed as the consortium director. In 1994-1996 on the water area of more than 100 thousand sq. km seismic, ecological, infrastructure and other researches were conducted. Seismic works 84

investigated the regional structure of Kazakhstan Caspian sector, determined high quantity of local traps, including Kashagan, Kurmangazy, Kalamkas-sea and others, some of them were detailed for the installation of prospect drilling. In 1997 Kazakhstan Government signed with the Consortium OKIOC the Agreement on the production division (APD), and in 1999 the prospect drilling began. On July 2000 the Consortium announced about the oil discovery at East Kashagan in the well No. 1. It was the exact moment, when holding the capsule with oil from this well, the President of Kazakhstan Nursultan Nazarbaev said: «Today is the happy day for Kazakhstan people. The oil discovery at Kashagan is a great help for our independence, for the further prosperity, the improvement of our people’s live. Great hopes of Kazakhstan people have realized». After East Kashagan the deposits West Kashagan, Kalamkas-sea, Kairan, Aktoty and South-West Kashagan were discovered, and in Russian sector – Shirotnoe and Khvalynskoe. The discovery of Kashagan deposit allowed increasing of oil reserves on 35%. First oil of Kashagan shall be received in 2008. At the present time at Kashagan and a number of other deposits of Caspian Sea preliminary and prospecting works are performed [86]. The gas industry of Kazakhstan is relatively young, it's development commenced in 70-ies of the last century. Kazakh Soviet Encyclopedia published in 1981 highlights that “the availability of huge commercial reserves of natural gas, high efficiency of their use and relatively low capital intensity factor allow within the short term period to change the structure of the fuel mix in favor of gas. The development potential of the gas industry in Kazakhstan is very big”.Development in the former USSR of integrated infrastructure resulted in construction of transmission networks on the territory of Kazakhstan including the trunk gas pipelines Bukhara-Ural; Central Asia-Center; and BukharaTashkent-Frunze-Alma-Ata which are still used to supply the blue fuel to customers. The integrated gas transportation system was centrally administered and in Kazakhstan the operations were mainly managed by Kazglavgaz. Turkmen and Uzbek gas had to be transported northwards through the territory of Kazakhstan. Remarkably, the main pipeline routes were designed and laid through 85

the territory of western Kazakhstan exactly in the areas were the major Kazakhstani hydrocarbon fields are located. After Kazakhstan gained its independence, the management of the main gas pipelines had been taken by the local state-owned holding, Kazakhgas. Meanwhile the effective business operations required high level of capital investments not only to ensure the sustainable operations and maintenance but for the prospective system development as well. Under then prevailing general economic conditions Kazakhgas could not adequately address these challenges and the government took decision to attract foreign investors. In summer 1997, Belgian Tractebel S.A. and the Republic of Kazakhstan entered into Concession agreement for domestic and international gas transportation systems. The concession, with the term of 15 years and an option of further prolongation subject to fulfillment of investment commitments, covered the bulk of the system assets including 10 trunk gas pipelines, 21 gas compressor stations equipped with pipe compressor units, and three underground gas storages. To operate under the Concession, the potential investor established two companies, Intergas Central Asia (gas pipelines operator), and a utility monopoly, Almaty Power Consolidated. Besides, along with appearance of the concessionaire the gas demand in the country had sharply declined as the investor was dealing solely with the gas transmission and was not involved in gas supplies from its own reserves. For the end users it turned into growth of prices for irregularly supplied gas and power. Used to the social protection consumers probably for the for the first time in their experience had to face disconnections of power and heating provoked by irregular payments of their own salaries and by litigations with the gas suppliers. Three towns in the southern Kazakhstan were seriously suffering from the shortages of gas and heating supplies, and some witnesses say that the freezing population was chopping down parks and gardens. Protects meetings became habitual in Almaty, especially active were pensioners of “Pokoleniye” movement. Feeling its unstable position Tractebel wasn't prompt to make any investments in the industry and already in 1999 the company's management started to articulate its reservations 86

concerning the reasonability of its presence in Kazakhstan . The problem of the management of the gas transportation system had to be addressed immediately, especially because the Uzbek suppliers were often inclined to raise gas prices. In February 2000, the national oil transportation company, KazTransOil, established a subsidiary, KazTransGas, which took over 100% stake in Intergas Central Asia. KazTransGas is entrusted to represent the governmental interests both, on the domestic gas market, and internationally. The company manages the business of transportation of natural gas through the main gas pipelines, performs gas trading on domestic and external markets, carries out development, financing, construction and operates gas pipelines and gas storages. Over the three recent years of operations on the domestic gas market the company has achieved more than impressive results. KazTransGas was established pursuant to the Resolution of the Government of the Republic of Kazakhstan No. 173 dated 5 February, 2000 [87]. Main activities of KazTransGas group of companies include : − Transportation of natural gas through main gas pipelines, domestic transportation, export transportation, international transit and storage of natural gas in underground gas storages (UGS); − Transportation of natural gas through distribution gas pipelines; − Sales of natural gas on the domestic market; − Gas production and processing; − Production and sales of electrical power; − Implementation of governmental policies for development of gas industry of Kazakhstan. Starting from February, 2002, KazTransGas is a part of the national oil and gas company, KazMunayGas. KazTransGas is the Contractor under the subsoil use agreement for development of Amangeldy group of gas fields in Zhambyl region. KazTransGas Group of companies, in aggregate, includes gas production, transportation, marketing and trading companies involved in sales of gas and gas products; operates the assets for 87

generation and distribution of heat and power energy, and a number of service companies. Currently, KTG owns the main gas pipeline transportation system, regional gas distribution assets in six regions, and the stock in certain domestic power companies. In parallel, by way of is undertaking the projects outside Kazakhstan thus, the Company develops its gas transmission base and expands the gas sales market share. KazTransGas Group of companies includes: 1. Amangeldy Gas, LLP, operator for production and processing of natural gas at Amangeldy gas field; 2. Intergas Central Asia , JSC, operator of main gas pipeline transmission; 3. KyrKazGas, a joint venture with KyrgyzGas, JSC, operates and maintains the sections of Bukhara Gas Bearing RegionTashkent-Bishkek-Almaty main gas pipeline passing through the territory of Kyrgyz Republic; 4. KazTransGas Aimak, JSC, regional gas transmission, distribution and sales of natural gas to industrial, residential and corporate clients; 5. KazTransGas Almaty, JSC, management of gas and gas distribution companies supplying natural gas to the clients in Almaty city and region; 6. KazTransGas Tbilisi, LLC, gas supply of Tbilisi; 7. KazTransGas LNG, LLP, operator for treatment and processing of natural gas from Zhanazhol gas field supplied to clients in Aktobe ; Samruk-Energo, JSC, effective management of power assets held in Zhambyl Power Plant named after T.Baturov, Almaty Power Consolidated, KMG-Energo, JSC, elaboration and implementation of long-term state policy for modernization of existing and construction of new generating capacity. Being aware of its activities' impact on local communities, and ultimately, on the national economy and public welfare, KazTransGas takes seriously the issue of its corporate and civil responsibility. While performing its obligations in relation to the sole shareholder, the NC KazMunayGas, the employees, business partners and to the public 88

in general, KazTransGas strictly follows the governing legislation and civil norms. Key operational and financial indicators of KTG Currently, there are 9 gasified regions in the Republic of Kazakhstan. These are mainly the southern and western regions of the country. The Group of Companies (hereinafter the Group) is represented in 8 out of 9 regions of the natural gas market - South Kazakhstan, Zhambyl, Kostanai, West Kazakhstan regions, Almaty, Mangystau, Aktobe and Kyzylorda regions. The total gas transportation system includes an extensive network of main gas pipelines (MG), compressor stations (CS) underground gas storage facilities (UGS), as well as distribution pipelines The length of the main gas pipelines is over 12 thousand km, including 900 km of branch pipelines. For gas transportation, 21 KS are used, where 278 gas pumping units of 12 types are installed, their total capacity is 1982 MW, three underground gas storage facilities − UGS 'Bozoi "UGS" Akyrtobe "and UGS' Poltoratskoye" with a total active volume over 4.65 billion cubic meters and 124 gas distribution stations. Also, the Company operates gas distribution networks (and their facilities) with a total length of 15 950.821 (excluding Kostanai region − 681.523 km.). In the technical sense, distribution pipelines are the part of the pipeline system and consist of pipelines of high, medium, low pressure and their facilities. Their main function is to transfer gas to the end user with minimal losses and ensuring strict accounting of sold gas. In the domestic market, the KazTransGas Group of Companies implements over 60% of gas sales. Natural gas sales for the reporting period amounted to 8 479 million cubic meters, or 99% of the planned target, which when compared to the same period the performance amounted to 169%. Performance measures and TTR of trunk transportation for 2010 as compared to 2009 remained unchanged, but compared to 2008 decreased due OJSC Gazprom’s decision to cease transporting Turkmen gas.

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The Company continued the implementation of an important social project related to the development of the gas field located in Amangeldy, Zhambyl Region. The current performance stock amounts to 25 boreholes. The increase in gas production at the Amangeldy field during the reporting period, when compared to the same period in 2009 is due to the intensification of the wells yield (hydraulic fracturing in 5 boreholes) carried out in 2009. In 2010, natural gas production at Amangeldy field was scheduled to amount to 330 million cubic meters, and the extraction of gas condensate to the amount of 24 thousand tons. 344.051 million cubic meters of natural gas and 24.1 thousand tons of gas condensate were actually produced [87, 88, 89]. Table 11 − Key operational and financial indicators of KTG Indicators Gas Sales* SC KazTransGas SC KazTransGas-Aimak SC KazTransGas-Almaty Transportation TTR Gas production Condensate extraction

UOM 2007 m3 mln 5 399 m3 mln 543 m3 mln 4 437 m3 mln 963 m3 mln 114 220 m3 bln 56 482 m3 mln 320 thous. of 26 tons Remark – Sources JS KTG annual report 2011

2008 5 465 368 4 559 906 116 729 58 086 338 26

2009 5 008 674 4 340 1 076 91 089 43 660 354 26

2010 8 479 3 240 4 875 1 113 99 446 33 649 344 24

Table 12 − Key economic indicators of the Group KazTransGas (million KZT) Description 2007 Revenue 178 986 Expenses 134 384 Pretax profit 44 603 Corporate income tax 15 874 Final profit before minority 28 729 interest deduction Minority interest -3 279 Final income (loss) for the period 25 449 Remark – Sources JS KTG annual report 2011

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2008 207 029 177 169 29 096 4 524 24 571

2009 208 434 154 367 56 196 10 926 45 270

2010 269 726 184 285 85 415 21 858 63 557

0 24 571

0 45 270

0 63 557

The actual final profit for 2010 amounted to 63 557 million KZT, which is 40% more than in 2009. Growth in total revenue resulted primarily from the sale of natural gas both domestically and abroad [90]. Table 13 − Key Performance Indicators (KPIs) of the Strategic charts of the Director General Financial and Economic Indicators (KPI) Economic Value Added, Economic Profit, EVA Return on involved capital, the average for the period, (ROACE) Net profit EBITDA margin

UOM

2006

2007

2008

2009

2010

KZT bln

5.80

12.21

10.18

19.89

31.24

%

14.15

15.87

14.64

18.09

20.17

KZT mln

10.7

25.45

24.57

45.27

63.56

%

29.67

34.27

28.65

46.58

39.82

201 382

194 889

260 808

16.8

19.6

23.36

Sale proceeds

KZT 140 164 mln 390 717 Labor efficiency KZT 7.6 9.1 mln Remark - Sources JS KTG annual report 2011

For the period 2006 to 2010, there is a positive trend of fundamental financial and economic indicators for the Company: economic value added (EVA), return on average capital employed (ROACE), return on equity (ROE) and total income. Growth in economic value added (EVA) in 2009 and 2010 amounted to 9.71 and 11.35 billion KZT respectively. It should be noted that a significant increase in economic value added (EVA) was caused by the resumption of trading operations for gas export and retention in 2010, on the conditions of "take or pay" on the midterm contract with OJSC "Gazprom" for the transit of Central Asian gas.

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2.2. Human Resources Policy of JSC KTG The main value of JSC “KazTransGas” is its personnel working in different places of Kazakhstan, as well as in near and far abroad throughout the world. To date, the total number of personnel, including those with subsidiaries, exceeds 11 thousand people. The 2011-2015 Human Resource Policy of JSC NC “KazTransGas” was developed in accordance with the Long-Term Strategy of JSC NC “KazMunayGas” and provisions of the 2010-2020 Human Resource Policy for the Group of Companies of the NWF Samruk Kazyna JSC. The Policy outlines main areas and approaches of HR management for the implementation of the mission and strategic goals declared by KMG [91]. Personnel policy of “KazTransGaz” joint stock company (further –JSC KTG personnel policy) is designed in accordance with the clauses of the Strategy of JS NC “KazMunayGaz” group of companies development and represents personnel management main trends and approaches to implement its mission and declared KTG strategic goals. The success of personnel policy implementation depend a lot of from recognizing by the company’s all management levels human resources high economic significance as the important component of company’s strategic potential. KTG personnel policy is drafted to consolidate existed approaches, elaborated personnel management methods and practices with consideration of the best experiences in the field of personnel affairs. These will allow formulating the unified approach and creating company’s corporate system of values in personnel management sector. Such a system assumes task sharing as following: KTG keeps general managing at the same time giving self-determination in personnel policy to conglomerate subsidiary. KTG immobilizes general strategy, determinate directions development strategy, developing and translation of the main approaches of personnel management, the most important corporate culture elements, and its leading role in internal communication system. In their turn, conglomerate subsidiaries participate in developing based on common strategy decentralized plans and initiatives of their own

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organizations and are responsible for their realization and achieving admitted goals. KTG personnel policy is based on following core principles: Complexity - all aspects of personnel management involvement System – all strategy composing elements are considered as interdependent Transparency – exposure on all stages of human resources managing process Feasibility – application of modern researches results in the field of human resources management providing maximum economic and social effect Effectiveness - personnel management adjusting costs should be recovered by the production operation results KTG personnel policy defines following basic approaches: − Company’s personnel is regarded as a human resource able to provide sustainable competitiveness and leading positions on the market in case if it is well planned and its optimal utilization and quality improvement correctly done; − Company’s personnel is the corporate culture and values carrier and assists to create public confidentiality to company’s activity on the regional, state and international levels; − Human resources management is considered as one of most important tasks of company’s organization management on all hierarchy levels; − Human resource is viewed as intangible asset obtained in competition and spent for that money as long-term investment into company’s development; − Satisfaction of each employee social and material needs in accordance with their personal contribution into KTG strategic goals achievement; Setting with each employee long-term labor relations based on RK Labor Code stipulations that give employee an opportunity to exercise employee possessing level of professional competence as well as to improve it in accordance with company’s needs and requirements of the job content level. Personnel policy implementation assumes responsibility of both company’s top managers 93

and line HR-managers fitting motivating HR-practices. In this sense HR-service runs general management of the integrated personnel policy implementation process, provides personnel administrating services, designs effective HR-instruments, and renders professionals HR-consulting. Normative-regulating documentation and procedures, methodological approaches, information and technological supporting systems, other needed components of the personnel managing system to be designed basing on the key points of this personnel policy. Personnel evaluation regularly carried out to ensure conducting companywide unified format of personnel policy. The main goal of KTG Human Resource Policy is to improve the efficiency of human resource management through the establishment of an integrated system of human resource management focused on making the maximum profit and ensuring leadership in the competitive environment, based on economic incentives and social guarantees, and facilitating the balanced recognition of employer and employee interests and development of relations between them to the benefit of the Company. KTG not only sets tasks for its employees, but also creates conditions for them to improve their professional expertise and skills, develop their professional and creative abilities, build up personal potential and have carrier growth prospects. The basis for successful activity of JSC “KazTransGas” are the corporate values and standards that are designed to provide trust and respect to business community, partners, representatives of the government and all those on whom the success and prosperity of JSC “KazTransGas” are depended. They cause a sense of pride to workers of JSC “KazTransGas” and desire to achieve the best results at their work. Honesty and impartiality are the basis of KTG activity and business reputation. KTG tolerates no conflict between personal and professional interests. Deception, concealment and false statements are incompatible with the status of a KTG officer or an employee. Responsibility is the guarantee of KTG performance quality. KTG bears responsibility in accordance with its commitments, legislative requirements, contractual obligations, and normal business practices, moral and ethical principles. KTG realizes its social 94

responsibility to the state and society. KTG employees and partners have the right for honest and fair treatment, irrespective of their race, language, political and religious beliefs, sex, nationality and cultural association. The integrated HRM system of KTG consists from six basic functions: employees’ training and development, employees; career development, performance appraisal, compensation, recruitment and selection, and HR planning. Current Company Human Resources Situation JSC KTG is one of the largest employers in Kazakhstan. Company has more than 11 000 employees (11 600), 53% of them work on business-project “Transportation”, 1% - “Gas projects”, 42% “Downstream”, 2% - “Finding and producing natural gas”, 2% “Service projects”.

Figure 2 - JS KTG Actual personnel subsidiaries wise 2011

Age rate of the most employees group differs from 25 to 49 years old that composes around 80% of entire personnel and appears to be optimum balance of young and experienced manpower. Average age of company employees is 37 years old.

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Figure 3 - JSC KTG employees structure by age

Approximately 32% of personnel compose women. Company male and female rate depends on business specifics. 17% women work on executive positions in the company. Those staff members who have different high education diplomas compose 57%, herein the weight of two categories – workers and office clerks – is 72%. With exclusion these two categories 84% personnel graduated high education universities. In more than half affiliated companies 20% of their heads possess different academic degrees/MBA. More than 1/3 of the personnel have more than 5 years experience of working in oil and gas industry. Staff turnover is 9.9%, satisfaction indicator – 75% [90].

Figure 4 - JSC KTG employees’ structure education wise

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Conducted evaluation displays high degree of Company staff potential that is a good basis for successful condition to implement planned initiatives and reaching company new quality level of human resources management. Nevertheless, not all the company’ subsidiaries fully practice advanced personnel management instruments, in some of them all staff management still resolve into record management and short term training arraignments. As for such tasks as personnel planning, staff potential evaluation, and personnel motivation they remain unsettled. Within 11 years of its existence personnel management of JSC “KasTransGas” has passed all key stages of evolution development. In the past (1-2 stages) it was simple personnel inventory by the so called staff office. Today requirements change attitude to personnel. 3th stage (2008-2009) was crucial moment, just at that time the normative- regulating documentation on all such aspects of HR as personnel management, goal and tasks determination, performance appraisal, and training and development needs revelation had been designed and set. The 4th stage (2009-2015) is characterized with the beginning of the generating and implementing of the normative- regulating documentation which have to change an attitude to personnel as organization strategic resource, i.e. its planning, evaluation and control skills accumulating. Along with that it is necessary to take into account its specific peculiarities different from financial, material-technical and other resources, because of human resources require its continuing development and motivation. At the current stage a number of projects, which must bring closer human resources management to the best world practices, will be implemented. Nevertheless, not all the company’ subsidiaries fully practice advanced personnel management instruments, in some of them all staff management still resolve into record management and short term training arraignments. As for such tasks as personnel planning, staff potential evaluation, and personnel motivation they remain unsettled.

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Figure 5 - JSC KTG employees’ structure by education level

Employees’ training and Development. Training is the process of making proficient through instruction and hands-on practice that is expected to be used in the performance of assigned duties. Research on employee training has stressed the impact of training on different types of outcomes. A popular distinction in what training may contribute is made in the four-level model of Kirkpatrick (1998). This model distinguishes; (1) reaction criteria that represent attitudinal and affective responses to the training; (2) learning criteria, learning outcomes of the training without reference to the performance for which the training was meant; (3) behavioural criteria, actual on-the-job performance; and (4) results criteria, distal and macro criteria that relate to productivity and profits. Training can be beneficial to organizations but, in practice, obstacles in the implementation may lead to diminished outcomes. Although investment in training might be a wise decision, it may not necessarily lead to improved productivity. For example, in a survey on the impact of human capital investment on business productivity, Lynch and Black found that the number of employees trained did not have a substantial impact on productivity. There may 98

be many reasons to engage in training programmes, and not all may be expected to lead to improvement of organizational output [92]. The purpose of KTG personnel training and development is to build and maintain the required level of professional expertise in a view of the requirements and prospects of KTG strategic development. The training costs are long-term investments in the development of KTG human resources. JSC KTG objectives in the area of personnel training and development are as follows: − develop and implement the training system that includes identifying of training needs, training planning and budgeting, organization and control of training efficiency; − establish corporate training in accordance with the specifics of KMG business processes; − develop corporate training standards; − use the best world experience, knowledge and good practices of labour organization in the process of personnel training and development; − ensure general development of personnel in the training process: establish the institute of internal coaching, mentoring, development of managerial personnel pool, enhancement of corporate culture; − motivation of employees to improve work efficiency. − Training and development of KTG personnel is based on the following principles: − systemic – all elements of the professional training system and professional development shall be subordinate to the KTG strategic goal; − dynamism and flexibility – any adjustment of KTG goals and objectives shall result in the change of training goals, topics, priorities, methods and forms; − regularity and continuity – training and development shall not be occasional, but systematic and well planned; − effectiveness – training and development shall be accompanied with clear and measurable criteria for assessment of achieved results; − practical orientation – training and development shall be, primarily, oriented on growing professional expertise and business skills; 99

− joint responsibility – an employee, who takes the training course, a coach (teacher), a head of a respective structural subdivision and HR Department shall be jointly responsible for the training effectiveness. KazTransGas pays special attention to the issues of training and human resource development. For the development of the corporate training, the Company uses the resources of training centers of the KazMunayGas group of companies and collaborates with long-term partners for joint development of human resources. A set of actions, aimed at acquisition of knowledge and skills by the employees of the KazMunayGas Group of companies, instead of the traditional individual training, has made it possible to train 25,494 people for the total amount of 2,298,205 thousand tenges, with the average cost of training amounting to 90,146 tenges 91 tiyns(figure 6).

Figure 6 - Number of KMG group of companies employees trained Remark - Source annual report of JS NC KMG, 2010

In addition, in 2010 trainings for the employees of the KazMunayGas group of companies were held mainly on the territory of the Republic of Kazakhstan for the purposes of the Kazakhstan content development in the services purchased and support to the 100

domestic training suppliers. Workshops and courses in the engineering specialties in the absence of similar offers from the domestic suppliers, programs for the development of the succession pool and discharge of obligations on long-term agreement were an exception.

Figure 7 - Number of training on the territory of RK,CIS and non-CIS Remark - Source: annual report of JS NC KMG, 2010

The majority of the training activities were designed for the operational personnel – 64% of the total number. The capabilities of such corporate training centres as Educational and Courses Centre of “Intergas Central Asia”, Training Centre of the “OzenMunayGas” PB and LLP “Embaokuortalygy” were used for re-training and development of competence of the operation personnel. A significant assistance to the solution of this issue is provided by PE “Corporate University “Samruk-Kazyna” (earlier named PE “Unified Human Resource Development Center”), which organizes training for the employees of the KazMunayGas group of companies, and develops its own training programs both for KazMunayGas, and other national companies, which are part of JSC NWF “Samruk-Kazyna”. Development of universal curricula, especially related to managerial skills, allows forming unified requirements towards the knowledge and skills of the administrative and managerial personnel, as well as engineers and technology employees [85].

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Overall, we expected training to have a positive effect on organizational effectiveness because raising the level of and range of workers’ competencies would imply a broader repertoire of behaviour that may be used in the organization to improve performance. A substantial number of studies indicate a positive relationship between HR interventions and organization level performance. The studies indicate that the effects of training on organization productivity and profitability are less well researched than those examining the effect of training on trainees’ attributes (such as wages or mobility).As it was mentioned above total investment of KMG in employees’ training and development programs in the year 2010 was 2,298,205 thousand tenges. The total amount of trained employees was 25,494 people, that 300% above number of people how were trained in the year 2009. Now let’s examine the key financial and performance indicators of KMG for the last 3 years. In the year 2010 the total income was 2 252 197 mn KZT and total profit 305 309 mn TKZ, that indicates 275% increase against year 2009. In spite of many opponents can argue that it could be direct correlation between investment in training and total company’s profit, we can conclude that the rise of KMG’s productivity and profitability in some sense is the result of its HR policy, specifically its training programs. Career Development Besides systematic implementation of short-term training and retraining programs, a constant work is done on training the succession pool for managerial positions. For this purpose, such methods of human resource development as secondment and traineeship are actively used. Employees are seconded under the projects which are jointly implemented with international partners (Tengizchevroil) and to the newly created structures and operating companies (Kazakhoil-Aktobe, CPC and others). Every year, under the partnership on these projects, as well as within the framework of the relations established with oil companies in foreign countries (JCCP, JOGMEC, Chevron etc.), employees are sent for traineeship to international offices of the partner companies for the exchange of experience with the leading oil and gas companies. 102

The employees, who are sent for secondment or traineeship, enjoy the possibility to learn the experience of the leading oil and gas companies. The Company continually works on establishing the HR Pool of managerial and administrative positions of KTG from specialists of KMG Group motivated to carrier growth with a high level of professional expertise and managerial competency. The candidates for enrolment to the HR Pool undergo through the selection process of two stages: First Stage: tests of employee skills on analyzing numeric and verbal information and writing an essay. Second Stage: assessment of business and leadership competencies by the assessment centre. Based on the test results the individual carrier development plans for improvement of professional knowledge and managerial competencies are worked out for the employees enrolled in the HR Pool. At the same time, the regulations on the Integrated HR Pool for KMG Group are being developed to ensure continuity in appointment on the key positions of the company. The work is continuing on forming the Common Administrative Succession Pool for the KazMunayGas group of companies applying up-to-date methods of assessment of the nominees by means of staged selection (testing, essay analysis, assessment centres). An individual career plan is developed for each employee enrolled on the administrative succession pool for gradual preparation of the succession candidate to the assignment to a key executive position within the KMG Group of companies. At the same time, as part of the project, NWF “Samruk-Kazyna” is forming a management candidates’ pool for the development of succession plans for occupation of the key management positions within the group of companies of the “Samruk-Kazyna” Holding Company. Performance Appraisal Performance appraisal (PA) is among the most important Human Resource practices. PA has increasingly become part of a more strategic approach to integrating HR activities and business policies and may now be seen as a generic term covering a variety of activities through which organizations seek to assess employees and develop their competence, enhance performance and distribute rewards. Thus, both practice and research have moved away from a narrow focus on psychometric and evaluation issues to 103

developmental PA, which may be defined as any effort concerned with enriching attitudes, experiences, and skills that improves the effectiveness of employees. Performance appraisal can be defined as a periodic evaluation of the output of an individual measured against certain expectations. The process involves observing and evaluating employees’ performance in the workplace in relation to pre-set standards. Conventional approaches to performance appraisal treated it as a measurement exercise, while more contemporary approaches are more concerned with information processing within the performance appraisal decision-making process. Performance appraisals are used for a number of reasons and can have a significant impact on salary administration, performance feedback, promotions, training, development, and identifying an individual’s strength and weaknesses. Several human resource scholars suggest the importance of performance appraisal in providing backup information for management decisions when salary rises, transfers or corrective actions are called into question. Performance appraisals can be a critical part of a company’s success because they allow the company to retain and reward high performers and offer guidance and improvement to poor performers. Performance appraisal can be used for two primary purposes. First, to help managers in making administrative decisions, especially regarding pay and promotions, and, second, to meet developmental objectives, such as coaching staff and assessing their training and development needs.KTG applies a system of performance appraisal oriented on two components to provide comprehensive and objective evaluation and rational management of personnel efficiency: 1. Management by Objective that is the system of quarterly assessment of progress and quality of objectives achieved by an employee. Based on the assessment results a bonus is paid as per the differential scale of ratings and ratios. 2. Competency Assessment that is the system of annual assessment of performance as per the indicators set out for the achievement of objectives by the most acceptable way. Based on the results the decisions are made on further professional development of an employee (enrolment in the Human Resource Pull, sending for training, promotion, etc.)Annually according to the assessment 104

results the employees make up their individual development plans, which include trainings necessary to achieve the goals assigned. Along with the assessment system of the KMG personnel there is an appraisal system of the human resources to define the employees’ compliance with their positions. The personnel appraisal is carried out not more than 1 time in 3 years by testing the employees in their professional area. At the moment the assessment system of personnel is transmitted to the KMG subsidiaries so as to create a unified corporate approach that will allow facilitating adaptation of employees in case of their transition inside the KMG group and to create transparent and objective conditions for professional growth of the employees.

Figure 8 - JSC KTG attestation results

Compensation System As in any other activity, the design of the compensation plan is an important element to be taken into account within the human resources management of the firm. These plans should be stimulating, flexible, easy to understand and administer, fair, competitive and guarantee the security of the employee. According to the literature, the employee compensation plan has the following 105

main functions: to remunerate the employee for his work (compensation), to channel his efforts towards a variety of activities in accordance with the objectives and priorities of the firm (management and control), and to induce him to dedicate the greatest possible effort to his task (motivation). In this section we will discuss the most relevant aspects of KTG compensation policy. When determining the financial compensation of its employees, the firm must take into account the composition of each one of the different types of plan. Thus, there could be a fixed part, or basic salary, and a variable part, made-up of commissions and bonuses and also some additional components such as social benefits or expense allowances. The fixed part, or basic salary, is a fixed payment made to the employees at pre-determined intervals and which is guaranteed independently of the result obtained during the period immediately prior to it. This component makes the employee who occupies a specific job feel that he is incorporated into the firm and it tries to satisfy his need to maintain a stable income. Its amount is usually a function of worker's experience and ability, together with the time during which the individual has carried out the task. On the other hand, commissions represent an incentive to stimulate performance. They are defined as a variable payment based on short-term results, generally with reference to sales, performance or profits achieved. These two mechanisms are usually combined, offering remuneration with both a fixed and a variable component, which supposes a tendency that distances itself from the traditional compensation formulas. One of the main responsibilities of management is to properly motivate its subordinates in such a way that they dedicate a greater effort to achieving the general objectives of the organisation. Many firms fundamentally depend on the motivation of their employees, and have developed a range of compensation plans to guarantee such motivations. KTG is striving to provide a competitive remuneration and social support system for its employees, making it possible to employ the best specialists in the oil and gas sector with sufficient motivation effect for the increase of labour productivity, enabling to get an objective assessment of contribution made by each employee for the achievement of common goals of the Company. In a view of this purpose KTG is working on the establishment and 106

implementation of a single policy in the area of labour remuneration and social support for employees in all regions where the Company operates. Company sets high expectations for its employees and, therefore, the remuneration in KTG directly depends on the result of a personal contribution and performance quality [104]. 2.3. Stakeholder Approach of the Corporate Social Responsibility Policy of NC “KazMunayGas” In the twenty-first century marketplace, businesses are increasingly showing signs of becoming conscious of ethics and human rights as well as being economically, environmentally and socially active and responsible. At the same time, laws and other public initiatives are putting a lot of pressure on industries to improve ethical business practices, processes and actions. Researchers have found a strong correlation between social performance and financial performance of a business. However, the scale and nature of the benefits of corporate social responsibility (CSR) go beyond the financial ones and can include benefits such as improved perceptions of the company, proactive management of risk, building loyalty-based customers on account of distinctive ethical values, building a genuine culture of ‘doing the right thing’ within the organisation. CSR improves the company in social respects, as well as the financial and non-financial performance of a company and creates an environment of health and safety practice at the workplace and in society at large. The benefits of CSR practice are immense for corporations, the community and the environment. Many corporations use CSR methodologies as a strategic tactic to gain public support for their presence in global markets, helping them sustain a competitive advantage by using their social contributions to provide a subconscious level of advertising. Some government regulations require corporations to hold regular ethical training and this also results in employee loyalty and pride. Furthermore, corporations increasingly like their actions, activities, policies and processes to be visible through various manifestations of CSR. Kazakhstan has a wealth of mineral resources, with major deposits of petroleum, natural gas, coal, iron ore, manganese, chrome ore, nickel, cobalt, copper, molybdenum, lead, zinc, bauxite, 107

gold, and uranium. The offshore Kashagan oil field on Kazakhstan's sector of the Caspian Sea contains recoverable reserves of at least 7-9 billion barrels and the massive onshore Tengiz oilfield contains 6-9 billion barrels. The government is planning to increase yearly production of oil to 120-150 million tons by 2015. The oil sector dominates Kazakh industry and has been instrumental to the country's recovery from its transitional recession during the 1990s. The key energy sector is enjoying new transport capacity and large boosts from the high world market prices. Oil and gas extraction retains its familiar important role. From the first days of its existence, national company KazMunayGas has been seeking not only high production performance, but also efficient work management, high-quality assets structure based on the world advanced practices of oil and gas business, corporate management and human resources development. For a short period of time, the National Company KazMunayGas (NC KMG) managed to achieve significant progress. The Company established effective production links on the basis of the existing resources, introduced efficient planning systems, developed and realized ambitious projects ( both joint and independent) that are significant not only for oil and gas industry, but also for the economy in general. NC KMG JSC shows sustainable development, augments reserves and constantly increases its share in the Republican oil production. NC KazMunayGas JSC became the leading strategic company of domestic oil industry. Besides, the Company managed to occupy its niche on the world’s largest energy markets, gained the reputetion of a reliable partner, honourably represents the republic of Kazakhstan. Moreover, NC KazMunayGas JSC is a socially conscious company, which contributes considerably to the development of the society. “Kazakhstan’s business already stands firmly and is starting to realize its social responsibility and structure its activities accordingly. Our national companies and large investors serve as examples by donating money to charity, educational projects, healthcare, sport and culture, and providing real support for unprotected citizens” [90]. NC KazMunayGas JSC developed and realized a number of social programs aimed at material incentives of work, encouragement and professional growth of young specialists, care for veterans and invalids, and support of other segments of 108

social sphere of regions which are not directly connected with the production activity. The company sees its social responsibility as a voluntary contribution of business in society development in social, economic and ecological spheres. The contribution is directly related to the main activity of the Company and goes outside the scope of the minimum defined by the Law, in accordance with the social policy of the Company [91]. The social responsibility of business has become a major issue in recent years and the reporting of such activity is becoming more prevalent. Companies are attuning to the benefits of being seen as socially responsibly and many industries are jumping on the bandwagon of reporting CSR and using different media to communicate their activities in this arena to their stakeholders. This chapter considers the content of one type of such communications, the annual report, and looks at how NC KMG is taking a focused stakeholder view of CSR. Definition of CSR. Corporate Social Responsibility (CSR) remains a broad, complex and continually evolving concept that encompasses a variety of ideas and practices. It has been described as an ambiguous, subjective, unclear, amorphous highly intangible fuzzy concept with unclear boundaries and debatable legitimacy. Beliefs and attitudes regarding the nature of CSR have also varied over time. A wide variety of definitions have been proposed, however more recent definitions of CSR tend to focus on a firm’s responsibility toward its various stakeholders. Corporate social responsibility (CSR) means operating a business in a socially responsible manner whereby the business: undertakes ethical practices in employment and labour by improving workplaces; is involved in building local communities and communicates with concerned communities regarding the consequences of its policies and products; invests in building social infrastructure; contributes to a cleaner environment, its protection and sustainability; and contributes by way of its corporate governance to economic development at large. CSR is an integral component of the operations of a company whereby it voluntarily contributes to society in terms of economic, environmental, ethical and social investment. CSR is sometimes described as being a tacit contract between business and a com109

munity, whereby the community permits the business to operate within its jurisdiction to obtain jobs for residents and revenue through taxation. It is now seen as a vital tool in promoting and improving the public image of some of the world’s largest companies and corporations. Additionally, the community expects the business to preserve the environment and to make the community a better place to live and to work through charitable activities. Good CSR is about a company maximising its positive impact on society while at the same time maximising its own returns. In a nutshell, CSR is all about a corporation contributing positively and giving back to society. CSR mobilises business for advantage. The current economic crisis should make the socially responsible business even more important than ever before. The United Nations’ Global Compact aims to make it possible for companies all over the world to participate in and contribute to tackling various socio-economic problems such as human rights, labour exploitation, the environment and corruption. Stakeholder theory. Freeman’s now classic definition of stakeholders, arguably the most popular definition cited in the literature, proposed that stakeholders are ‘any group or individual who can affect or is affected by the achievement of a corporation’s purpose’ [93]. This is clearly a very broad definition and leaves the notion of stake and the fields of possible stakeholders unambiguously open to include virtually everyone. Providing more clarity, Clarkson distinguishes between ‘primary’ and ‘secondary’ stakeholders [94]. A primary or participant stakeholder is one without whose continuing participation the corporation cannot survive as a going concern. Secondary or non-participant stakeholders are defined as those who influence or affect, or are influenced or affected by the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival. Balancing these different types of stakeholders has been shown to have an effect on financial performance. Stakeholder theory recognises the fact that most, if not all firms have a large and integrated set of stakeholders to whom they have an obligation and responsibility. In recent years, stakeholder attributes have received increasing attention to aid managers in deciding how to 110

allocate their limited time, energy and other scarce resources to different stakeholder groups. When stakeholder theory is used as a managerial tool it is specifically concerned with identifying which stakeholders are more important, and as a result should receive a greater proportion of management attention. It is clear that different stakeholder groups can present quite different, and often conflicting, needs and interests. In addition there are four categories of stakeholders as benefit providers/receivers and/or risk providers/ bearers. Stakeholders may be granted different levels of salience depending on the number of categories into which they fall. The main stakeholder groups include shareholders, employees, customers, the local community and the environment. It also important to note that a single person may have different stakes in the organisation, for example they may be a customer, a prospective employee or an investor. The CSR Policy of NC KMG. The annual and CSR reports of NC KMG highlighted that CSR was defined and described by reference to their responsibility to a variety of stakeholders. This supports the literature arguing CSR can be most practically explained by reference to stakeholder theory. NC KMG noted that ‘The social aspect in business is becoming more and more important for the Company as it is the evidence of business reputation and one of the instruments which makes it possible to establish effective and balanced relationship with all stakeholders – the state, shareholders, personnel, consumers and partners and provide progressive development of business through comprehensive society development (improvement of industrial standards, educational level and health care, creation of new services and introduction of new products, life quality improvement)’. More specifically, CSR activities were communicated as their responsibilities and policies with regard their main stakeholder groups; namely, customers, employees, suppliers, shareholders, the environment and the wider community. Taking part in international initiatives of corporate social responsibility the company joined to the Global Compact initiated by the United Nations. The Global Compact represents a basis for 111

cooperation of the UN with business at all levels based on recognized values. The Global Compact appeals to business circles to follow nine fundamental principles in observing human rights, standards of labour relations and environment protection. Besides, the Company strives to show an example of high civil and social awareness, develop partnership with international organizations. The Company adheres to the policy of openness and transparency of intentions, and actions, providing full access to the results of its activity through making them public in mass media. Such policy makes it possible to eliminate hindrances and contribute to creditable attitude of the people towards the Company. The Company’s activity is not only the result of response to some events happening in society, it is aimed at developing the society up to the world standards. The implemented measures consist in social investments with forecast and expected benefits. Social investments imply strategic aim-oriented, long-term policy of the company. Social benefits suggest qualitative changes in economic and cultural life of society. Moreover, the Company strives to monitor and analyse social expenses, assess their efficiency and predict consequences of the changes implemented in this sphere through efficiency assessment system and adequacy of the funds allocated to the social activity of the Company. Social accountability and social investment. A corporation’s social accountability refers to the improvement of workplaces and communities. It is concerned with the protection of human rights. Corporate social investment includes activities that focus on establishing social infrastructure and contributing to the uplifting of communities through the transfer of technology, skills and education with the aim of creating sustainability. An organisation should have transparency and openness regarding its business activities; a system for preventing corruption, financial irresponsibility and underhand dealings; arrangements to produce an overall positive impact for a better society; facilities for socially responsible investment for education, healthcare, etc. Social accountability means to meet the expectations that society has of business in terms of social awareness and education, of holding businesses responsible for their actions and products.

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National Company KazMunayGas deems its social responsebility as a voluntary contribution to the development of the society in social, economic and environmental spheres, as related directly to the main activity of the Company and realized beyond the minimum requirements established by the law in accordance with the company’s capacity. KazMunayGas, as a socially responsible company, is committed to the ongoing implementation and improvement of the quality of social activities in the following main directions: Internal Social Responsibility − Development of HR Potential − Motivation System − Healthcare − Work Safety External Social Responsibility − Charity and Sponsorship − Environment Protection Social Partnership − Participation in the implementation of state and sector social programs, general Republic level activities − Participation in International Initiatives − Development of Regions Health and safety protection. In accordance with KMG’s Policy in health and safety protection, the main priorities are as follows: protection of the health of the personnel and population, ensuring environmental safety for sustainable development. KMG’s SDEs conduct their production activities in accordance with the requirements of the environmental legislation of the Republic of Kazakhstan, the Company’s Safety, Health and Environment Policy, the Uniform Occupational Safety Management System (UOSMS), Comprehensive Environmental Program (CEP) and approved action plans of KMG’s SDEs. The issues related to health and environment safety are monthly announced at the meetings of KMG’s Management Board and the Board of Directors, which increases the responsibility of KMG’s managers and specialists. Certification audit conducted by independent audit firm TUV Thuringen on 2-4 March 2010, 113

confirmed compliance of management with the requirements of ISO 9001, ISO 14001 and OHSAS 18001 international standards. On 4 June 2010 the 11th annual meeting on the matters of safety, health and environment, industrial and fire safety, civil protection and emergencies was held in Astana with the participation of the management and specialists of KMG’s SDEs. Problem issues the safety and environment services of the KMG’s SDEs face were discussed, and the corresponding decisions on improvement of organization and safety were made at the meeting.

Figure 9 - Expenses for Health and Safety Activities ( Million KZT) Remark - Source NC KMG Annual Report 2010

Every year, SDEs of KMG spend sufficient financial funds for the measures to provide safety of labour and to decrease the number of accidents at work. The Company spent over KZT2.8 bn in 2010. KMG has a system in place for management of heal safety and environment, industrial and fire safety and emergencies to identify, assess, control and eliminate harmful occupational hazard and exposure [91]. Sponsorship and Charity Activities. Sponsorship (charity) is rendered in the view of the Company’s priorities in the sphere of social responsibility. KazMunayGas annually spends considerable funds for the social sphere and for the support to the socially vulnerable groups of the population. Among the significant events 114

in the social policy of “KazMunayGas” in 2010 there was celebration of the 65th Anniversary of the Victory in the Great Patriotic War of 1941-1945. National Company “KazMunayGas” actively participated in the implementing of the Action Plan for Preparation and Celebration of the 65th Anniversary of the Victory in the Great Patriotic War of 1941-1945, approved by Decree of Government of the Republic of Kazakhstan No 94 of 15 Feb 2010. Together with the “KazEnergy” Association of Oil and Gas and Energy Sector Entities and Social Fund “Munaishi” named after N. Murabayev, a formal reception for 140 veterans from Astana city and Atyrau region was held, target material assistance rendered in the amount of 100,000 tenges for each veteran and mementos presented. In addition, as part of this anniversary celebration “KazMunayGas” implemented a number of projects, including: with the support of the Embassy of the Republic of Kazakhstan in the Russian Federation, teleconference bridge “Astana-Moscow” – “Kazakhstan and Russian Veterans’ Meeting: 65 Years On” was organized, thanks to the sponsorship of KazMunayGas, the book “Oil and Gas Industry during the Great Patriotic War” was published, the action “Heirs of the Victory” was held, in which veterans of the Atyrau oblast and over 7 thousands Kazakhstan’s citizens participated. Other socially important events were held. In total National Company “KazMunayGas” assigned more than 27 mn tenges for the targeted social assistance to veterans of war, implementation of the program for refurbishment of the their flats, and maintenance of the current activities of the veterans’ organizations [91]. Within the framework of the support to other socially vulnerable groups of the population “KazMunayGas” renders material assistance to the veteran workers of the petroleum industry via the “Munaishi” Social Fund. Disabled people, pensioners, low-income citizens, orphaned children and other socially vulnerable groups of population receive target assistance from the Company. Thus, in 2010 sponsorship and beneficiary aid was provided to Children Orphanage “Svetoch” (Astana), the Society of Disable Children of Astana, the Aktobe Oblast Corporate Social Fund “Shapagat”, CF “Lex” Consulting Center”, Social Fund “Voluntary Society “Miloserdiye”, Social Well-Being Fund “Sharapat” of 115

Astana, Kazakhstan Confederation of the Disabled and many other charity social organizations and individuals[91]. In the sphere of the development of social partnership, KazMunayGas actively participates in different activities, joint projects and programs of social partnership of regions, renders support to the creation of the modern engineering and transport infrastructure in the administrative centers. The National Company provided sponsor support to the V KAZENERGY Eurasian Forum, IX Eurasian Media Forum, III Astana Economic Forum, World Intellectual Culture Forum and other significant events at the national level to foster the prestige and image of our country in the international arena. In 2010 National Company “KazMunayGas” signed a Memorandum of Understanding with the Akimat of the Aktobe oblast, under which the Company renders financial assistance to a number of social and beneficent programs in the Aktobe oblast, new jobs are created and measures on training the local manpower are taken. KazMunayGas and its subsidiaries took an active part in the measures on mitigation of the consequences of the emergencies in the East-Kazakhstan and the Aksu region of the Almaty oblast, by channelling beneficent aid for the recovery of the social facilities and residential houses in the disaster-stricken areas. The team of the KazMunayGas group of companies also did not stand idly and organized collection of applications on voluntary transfer of money from their salaries in favour of those stricken by the flood. Over 281 mn tenges in total were transferred for the above-said purposes in 2010. In order to support culture, science and art, in 2010 KazMunayGas continued the contest in journalism “Power of the Pen”, the purpose of which was regeneration of the best traditions of the Kazakh journalism, improvement of the creativity and journalistic art in the mass media, as well as promotion of the awareness among the general public about important but not very well known events, interesting facts, and remarkable persons in the history of the oil and gas industry. Due to the sponsor assistance of KazMunayGas, holding a number of other educational projects was ensured, including: “S. Utebayev Scholarship”, within the framework of which the best 116

students and professors of higher education institutions, studying and teaching oil and gas disciplines were awarded scholarships named after Safi Utebayev, a series of “open lessons” on petrochemistry and equipment of the chemistry classroom in the Kazakh-Turkish Lyceum, the purpose of which is to carry out occupationally oriented work among talented children, generation of the students’ interest in the chemistry and research activities. Recognizing the relevance and importance of assistance, further development and stimulation of knowledge and creativity of talented youth, the Company rendered sponsorship to the children dancing group “Tumar”, television project “Intellectual Olympiads”, the publication project “Big Atlas of Kazakhstan” and a number of other projects and individuals. As part of the development of the capital of the Republic of Kazakhstan and the support to the state initiative on cultural and historical heritage, in 2010 “KazMunayGas” commenced implementation of the project for construction of “The Historical Museum of Kazakhstan” in Astana. The National Company pays great attention to the development and support to sports and healthy lifestyle, by providing annual sponsorship assistance to the National Federations of Tennis, Football and Judo of the Republic of Kazakhstan, and one-time support to other sports organizations and sporting events. Apart from the sponsorship assistance, in order to promote healthy lifestyle, the National Company and its subsidiaries hold sport competitions and contents dedicating them to holidays. To create favourable conditions for recreation and health improvement, the Company assigned significant funds for the construction of an environment and mud sanatorium on the shore of the Balkhash Lake. The JSC NC “KazMunayGas” Program for Construction of Multifunctional All-season Sports Grounds is continuing. Construction of 10 sports grounds in Astana, the sports and recreation centre in the village of Akkistau of the Atyrau oblast, 10 sports grounds in Zhana-Ozen of the Mangistau oblast, 3 sports grounds in Shymkent and 5 in Pavlodar has been completed. 29 facilities in all have been commissioned. All in all, in 2010, KazMunayGas and its subsidiary and dependent entities rendered sponsorship assistance (charity) for the amount of over KZT10 bn [91]. 117

Environment protection and sustainability. As previously discussed, stakeholder theory supports the idea that there are people outside the organisation (key communities) that have expectations for the firm, and that it is in the best interest of the organisation to meet these expectations. One of the most common examples of meeting the expectations of key communities is when organisations take steps to make their product and operations environmentally friendly. Often the motivation to be more environmentally friendly has to do with building the firm’s reputation with these very stakeholders, which is believed to lead to increased financial performance. Traditional categories of liability and negligence can be readily applied to business activities that cause environmental harm. While there is a strong consensus that business has ethical responsebility concerning the natural environment, a more controversial claim is that business might have ethical responsibility to the natural world. According to the former view (concerning the natural environment), environmental responsibilities are indirect. Business has direct responsibilities only to human beings, but fulfilling these responsibilities sometimes requires certain actions concerning the environment e.g. do not pollute water, do not dump toxic wastes, etc. According to the latter view, business would be said to have direct moral responsibility to the natural world. If animals, plants, or ecosystems have moral standing, then business ethics must address business’s moral responsibility to such natural objects. Reducing paper consumption can improve efficiency and reduce costs while also earning your company a reputation for being environmentally conscious. KMG’s Policy is aimed at the reduction of negative impact on the environment and improvement of the ecological situation in the territories of the corporate responsibility. In spite of the increasing production over recent years, there is a stable decrease in the specific emissions during oil production and refining and transportation of oil and gas. Thus, for example, in LLP “Atyrau Refinery” of JSC “KazMunayGas – Refining & Marketing”, the specific emissions during oil refining have decreased from 1.13 to 1.05 kg per ton of the refined oil [91].

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The volume of industrial and consumer waste decreased by 76.300 tons or by 51.4 %, year-on-year. The work on elimination of the oil-polluted areas and contaminated soil remediation is underway. 1,040 mn tenges were assigned during the reporting period for these purposes. Within the framework of KMG’s current waste management system, one of the core directions is implementation of the modern low waste technologies and use of high-performance equipment. For example, as a pilot project, the KazMunaiGas Exploration Production JSC is restoring oil polluted territories using the zeolite-microbiological method, which uses special hydrocarbondestructing bacteria for restoring the fertile properties of the soil. High-performance equipment is used for processing hard-todestruct oil, as well as installations for processing oil sludge, using the method of thermal desorption. To conduct liquidation with minimal negative impact on the environment, the Company uses high-technology mobile complexes for processing oil polluted soil and oil sludge, with the productivity of 30 tons per hour.

Figure 10 - Volumes of Production and Consumption Waste, tons Remark - Source: NC KMG Annual Report 2010

KMG annually spends a considerable amount of finance for the realization of environment protection activities. KMG’s SDEs 119

spent over KZT15 bn for the implementation of environment protection activities in 2010. In accordance with KMG’s Development Strategy, a Comprehensive Environmental Program of JSC NC “KazMunayGas” was developed and approved by the Management Board for 2006-2015 (CEP), the main objective of which is to ensure a systemic approach to environment protection in the KMG group of companies. The Program is being successfully implemented, and in 2010, the Plan of Environment Protection of CEP was adjusted in accordance with KMG’s priority business areas. The total amount of financial expenditures for implementation of the CEP, assigned by the SDEs in 2010, amounted to 24,726 mn tenges, against the planned 33,307 mn tenges, where the execution amounted to 74.2 percent [91]. The critical element of the environmental management system is operational environmental monitoring. Work is continued for the creation of an efficient KMG’s Corporate Operational Environmental Monitoring System, which has been determined as one of the main priorities of the Company’s strategy and was approved by KMG’s Board of Directors on 19 January 2009. Since 2005, the Company has developed and has been using the aerospace environmental monitoring system, as an integral part of KMG's Corporate Industrial Environmental Monitoring System, in order to automatically trace any changes in the environment on the whole territory of corporate responsibility of KMG, as well as to ensure taking adequate managerial measures on environmental protection. This aerospace environmental monitoring system is based on the application of geo-information technologies, utilization of modern special equipment and mathematic software for receiving and processing space photographs, and it allows collecting, analysing and generalizing all environmental data constantly, as well as modelling the environmental situation, which also allowed creating a continuously updated electronic environmental map. In 2010, on the basis of a new effective platform of geo-information system, the Company developed a new improved version of the aerospace environmental monitoring system, which has greater capabilities and allows solving a wider range of tasks. CSR is an integral component of the operations of a company whereby it voluntarily contributes to society in terms of economic, 120

environmental, ethical and social investment. CSR activities of KMG were communicated as their responsibilities and policies with regard their main stakeholder groups; namely, customers, employees, suppliers, shareholders, the environment and the wider community. Taking part in international initiatives of corporate social responsibility the company joined to the Global Compact initiated by the United Nations. NC KazMunayGas JSC is a socially conscious company, which contributes considerably to the development of the society. NC KazMunayGas JSC developed and realized a number of social programs aimed at material incentives of work, encouragement and professional growth of young specialists, care for veterans and invalids, and support of other segments of social sphere of regions which are not directly connected with the production activity. The company sees its social responsibility as a voluntary contribution of business in society development in social, economic and ecological spheres. In accordance with KMG's health, safety and environmental policy, the main priority directions are protection of health of the personnel and population, ensuring environmental safety for sustainable development. The “Comprehensive Environmental Program of JSC NC “KazMunayGas” for 2006-2015” is in place in the company, whose primary objective is to ensure systemic approach to the environmental activities in the KMG group of companies as a whole. The program is being successfully implemented. Alignment of the environmental measures in compliance with the high-priority areas of activities was carried out in 2010. Great efforts were made to implement the governmental Programme for disposal of associated petroleum gas at the deposits and stopping gas flaring. The strategy of KazMunayGas in the sphere of corporate social responsibility and relations with parties concerned consists in securing long-term and mutually beneficial cooperation, support to the most actual and socially significant project aimed for social-and-cultural and social-and-living development of the regions of the republic, support to the socially vulnerable strata of population, and implementation of measures on the level of the republic and internationally, in order to improve the image of the state as a whole and that of the Company, in

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particular. The Company continues to be the leader of the business environment in terms of social expenditures [103]. Chapter summation To sum up above discussion we consider the human resource management strategy of KTG is developed to support innovation management, company’s effectiveness and environmental management with the same degree of importance. The purpose of KTG personnel training and development is to build and maintain the required level of professional expertise in a view of the requirements and prospects of KTG strategic development. The Company continually works on establishing the HR Pool of managerial and administrative positions of KMG Group from specialists of KMG Group motivated to carrier growth with a high level of professional expertise and managerial competency. KTG applies a system of personnel assessment orientted on two components to provide comprehensive and objective evaluation and rational management of personnel efficiency. Still, there are some limitations in JSC KTG HRM strategy development and implementation. All HRM practices must be internally consistent to help improve firm performance. In order to increase personnel’s role in implementation of strategic directions of the Company, KTG has to develop integrated policy in human resources management system. Company should develop HRM as an integrated strategy and planned development process for effective utilization of human resources for the achievement of organizational objectives. HRM system of JSC KTG must be designed in order to involve the development of an individual’s abilities and attitudes in such a way that the individual will be able to grow personally and contribute towards organizational interests. Unsolved problems of JSC KTG HRM policy are as following: − Inadequacy of personnel number and structure to activity scope, tasks of some subsidiaries; − Existence of some disproportion between personnel structure and production management; − Between office-management and industrial personnel; − Between managing company and its structural operating units; 122

− Imperfection of regulatory and legal framework in: Establishing the employees’ qualification requirements; − Pay system and employees social assistance, that allow attract and keep highly qualified professionals in the company; − Inadequacy of the professionals qualification to the production needs and strategic tasks of KTG business projects development; − Lack of standardized techniques of planning the number of office and management personnel; − Employees inadequate social protection in some affiliated companies; − Insufficient young engineering and workers manpower inflow level; − Insufficient attitude of supervisors in personnel issues decision making; − Low professionalism of HR managers. The realization of JSC KTG personnel policy is aimed to eliminate mentioned problems and bring company human resources management to the new quality level. Further in our thesis we make analysis of company’s HR practices for the methodical and practical recommendations development.

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3 ANALYSIS OF JSC KTG HUMAN RESOURCES MANAGEMENT PRACTICES AND POLICIES 3.1. The relationship between JSC KTG Human Resources Management Practices, Human Resources Management Strategy and firm Corporate Strategy Strategic and internal fit concept. In the strategic HRM field an ongoing debate contrasts the 'best practice' and 'best fit' approach. Simply put, the best practice approach assumes that certain HR practices universally outperform others. The 'best fit' approach assumes that the effectiveness of HR practices is context-specific. In this 'best fit' approach, researchers mainly focus on two types of fit: strategic or vertical fit and internal or horizontal fit [83]. Strategic fit stresses the importance of linking business objectives and HRM. Internal fit emphasizes the alignment of different HR practices into a consistent HR system. Conceptually, the idea of fit is convincing, which is why it continues to play an important role in strategic HRM research [75]. However, to date, only limited empirical support for the impact of fit exists. Also, the current operationalization and measures of fit are criticized. For example, how to measure the potential synergistic effects of systems of HR practices proposed in internal fit is not clear [84]. In addition, the current models do not do justice to the complexity of the fit concept. In strategic fit models, strategy is often oversimplified in static constructs (e.g. cost leadership versus differentiation) that do not capture the full breadth of business strategies in contemporary organizations. Becker and Huselid argue that fit is "inherently multidimensional and not easily captured by simple bivariate statements"[75, p.910]. Gerhart notes a "troublesome lack of progress on this front" [95, p.10]. Here, we aim to start developing alternative approaches for measuring fit that incorporate the breadth and complexity of the fit construct. We use in-depth analysis that provide a rich understanding of the underlying processes involved in achieving 124

strategic and internal fit. The aim of the chapter is twofold: contributing to the development of ways to conceptualize and operationalize these types of fit by offering alternative models, and evaluating these alternative models using qualitative data from document analysis, tests and interviews of JSС KTG. First, we describe fit and introduce our models. Next, we present our methodology and assess and evaluate our models using the case study data. Strategic fit. Although the strategic fit proposition plays an important role in strategic HRM theory, empirical support for its added value is scarce. Most researchers use 'classical' strategy typologies of Porter or Miles and Snow to operationalize strategy [96, 97]. Organizational strategies, however, are typically more complex and tend to consist of more elements than those captured in these classic strategy typologies. Boxall and Purcell formulate three main critiques on the 'classical' approaches for measuring strategic fit: they overlook employee interests, lack sophistication in their description of competitive strategy, and devote insufficient attention to dynamics [98]. These strategy typologies are unable to capture the uniqueness of business strategies. Yet, this uniqueness is seen as the potential source of sustainable competitive advantage. In sum, alternative approaches to measuring strategic fit in HR research are needed. Some steps have been made. For example, Gratton, Hope-Hailey, Stiles and Truss (1999) used a set of strategic objectives unique to the organization instead of a predetermined typology of business strategies. They measure strategic fit as the alignment between the set of strategic objectives and 'people policies'. These people policies "create and support the individual behavior and competencies that have the potential to be a source of competitive advantage" [99, p. 21]. They discern five levels of strategic fit, varying from a weak to a strong linkage. A strong link between individual objectives and business goals implies that business objectives are transformed into clear individual objectives, which are agreed upon annually. A weak linkage implies no clear communication of the business strategy to individual employees, and no mechanisms through which individual tasks and behavior are discussed and linked to strategic objectives [99,p. 24]. 125

Besides the content approaches discussed above, establishing fit also involves a process dimension. The idea of process approaches is that the integration of strategy, HRM processes and functions results in a fit between human resource needs (following strategy) and employee skills and behaviors (elicited by HR practices). For example, Golden and Ramanujam focus on the process of strategy formation and the role of the HR department in this process and distinguish four phases of integration between strategy and HRM: administrative, one-way, two-way, and integrative linkage. In case of an administrative linkage, HRM is seen as an administrative function without a long term or strategic focus [100]. Human resources are regarded as necessary costs, not as contributors to the success of the organization, and HR is not a member of the management team and has no informal influence on strategy development. A one-way linkage implies that business goals are considered first. HR practices are derived from these goals, but HRM has no influence on strategy formulation. If strategy affects HRM and, vice-versa, HRM affects strategy, a twoway linkage is seen. Human resources are treated as a success factor for the organization. The integrative linkage reflects the strongest fit. Here, the HRM function is fully integrated with strategy, formally as well as informally. HR is a member of the management team, and HRM has a long-term impact on the organization. Strategy and HR strategy are designed jointly. Gratton and Truss emphasize the difference between policy formulation and implementation [101]. When there is a strong linkage between strategy and HRM in theory, but not in implementation, no positive performance effects can be expected. Resource-based view researchers state that "the ability to implement strategies is, by itself, a resource that can be a source of competitive advantage"[6, p.54]. Strategy implementation is crucial, but often overlooked in research on strategic HRM. Sending a clear and consistent message to employees about what is expected from them and how their individual objectives are linked to business objectives increases the likelihood of seeing the desired behaviors of employees. Also, the degree to which employees participate in the objective setting process, in other words adding a bottom-up process to 126

implementation, can foster desired employee behaviors [99]. Thus, consistent implementation of strategy through HR practices is also necessary for strategic fit to be effective. Based on this overview, we propose an operationalization of strategic fit, containing three core elements: content, process, and implementation. Internal fit. Besides the need for strategic integration of HR practices, researchers found that "certain HR practices blend better than others do, and it is sensible to select practices in conjunction with and not in isolation from each other" [109, p.368]. However, the complexity of these subtle interactions makes it difficult to assess internal fit. Researchers have typically measured internal fit as either theoretically or empirically derived systems of HR practices. Guest, Conway, and Dewe present an overview of ways to study HR systems statistically, including factor analysis, cluster analysis, regression analysis, and sequential tree analysis. These techniques are used by researchers to find internally consistent systems of HR practices [24, 80, and 110]. Some studies find support for systems of HR practices affecting organizational performance [110, 111]. However, theoretically as well as empirically, researchers have not yet found consistent typologies [84, 112]. More insight is needed in which practices can be effectively combined in an HR system, and how individual HR practices affect each other. Qualitative research might help uncover this. Delery stresses the importance of knowing how HR practices support each other [113]. The different HR practices can be additively or interactively (synergistically) related. In an additive relationship, HR practices have independent effects on outcomes. For example, teamwork and pay for team performance may both stimulate team performance, but in different ways. In an interactive relationship, the effectiveness of one practice depends on the level of the other practices [113, р.294]. Two different types of interactive relationships occur. HR practices substitute one another, or they can have a synergistic relationship. In case of substitutes, different HR practices lead to the same outcome, which might be ineffective. A synergistic relationship refers to HR practices that together lead to a different outcome than the sum of the individual outcomes. This could be 127

either a negative synergistic effect (the whole is less than the sum of the parts) or a positive synergistic effect (the whole is more than the sum of the parts). Becker, Huselid, Pickus, and Spratt (1997) use the terms powerful connection for a positive synergistic effect, and deadly combination for a negative synergistic effect, where combining practices leads to unintended negative consequences, for example, teamwork and pay for individual performance. Internal fit models assume the effectiveness of powerful connections as opposed to deadly combinations [114, p.43]. Similarly, Baron and Kreps stress single-employee consistency, meaning that different parts of the HR system that bear on a single employee should be consistent. Besides single-employee consistency, Baron and Kreps also distinguish temporal consistency and among-employee consistency [115]. Temporal consistency is consistency of the HR practices over time. Among employee consistency implies that different employees in the same situation should be treated similarly. The HR system used for a specific group of employees should then be consistent. The need to more closely distinguish between the HR practices aimed at different groups of employees is also recognized by others. "The current approach to theorizing about and measuring fit implies very little variation or differentiation of the HR architecture, either between firms or within firms" [75, p.904]. Some researchers describe differentiation between employee groups, requiring different HR practices to stimulate high performance [44,116]. An example is the theoretical distinction made between core employees and peripheral employees [113,117]. Core employees are those who have a long-term relationship with the organization and can contribute to achieving a competitive advantage in a changing environment. Core employees may need a different HRM approach than others, and a good internal fit for this group is supposed to lead to critical performance outcomes. HR practices communicate messages to the employee [118]. The content of these messages should be consistent in order to be effective. In other words, focusing an HR system on dominant, consistent messages is likely to be effective as employees are selected, trained and developed to accomplish the dominant business goal. Bowen and Ostroff label this the 'strength' of the HR system 128

[118]. Boxall and Purcell point out that usually not one, but several desirable themes have to be communicated through the HR system [83]. Sometimes these goals can be competing, forcing a trade-off between different goals within the HR system. Thus, HR systems need a clear focus, but this focus is often a set of goals or themes because of the complexity involved. Based on this overview, we propose operationalizing internal fit in three elements: strength of interaction, dominant goals, and employee groups. Adapting to changes. An issue that has not received sufficient attention in strategic and internal fit is dynamism. Most organizations operate in dynamic environments. Changes occur constantly and organizations have to cope with these changes by continually adapting their business strategy to the turbulent environment. Yet, most HR researchers take a static approach in measurement. Boxall and Purcell therefore argue that "models should give better attention to dynamics"[98, p.55]. Some scholars have studied strategic fit as a dynamic construct, introducing different types of dynamic fit. Chakravarthy incorporates the influence of dynamic environments in strategic alignment in what he labels 'adaptive fit'. He distinguishes three types of adaptive fit: unstable fit, stable fit, and neutral fit [119]. Unstable fit corresponds with a defensive interaction with the environment. Stable fit implies that the organization reacts to environmental changes, in other words, the organization is a 'fast follower'. Neutral fit is the strongest type of fit, and despite what the name suggests, it reflects a proactive approach. The organization anticipates changes before they occur and constantly searches for market opportunities. "They often create changes in their environment, to which their competitors must respond" [119, p.36]. Lengnick-Hall and Beck challenged Chakravarthy's assumption that an organization moves from equilibrium to equilibrium [120, p.742]. They argue that organizations should have a close connection to the environment, such that long term successfulness will be achieved. Miles and Snow see fit as a process of continuously adapting to changes in the environment and stress that "unless a firm is alert and adept, today's fit becomes tomorrow's misfit"[121].

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Tight fit implies a close linkage between strategy and HRM, adapting easily to changes that occur. Early fit is a tight fit that is achieved before competitors do. Early fit is proactively oriented and aims at gaining a leading position. Here, we propose to add a dynamic element to the measurement of fit, that we will label adaptation to avoid confusion with the fit construct. Adaptation focuses on how supportive of change and how proactive or reactive organizations and their HR systems are and is important for maintaining internal as well as strategic fit in changing environments. We incorporate this in our measurement. Figure 11 lists the proposed operationalizations for strategic fit, internal fit, and adaptation. Below, we describe the study we performed to assess and evaluate the proposed operationalizations.

Figure 11 - Strategic and internal fit configuration model Remark: compiled by author

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Methodology We collected data from the document analysis, employees’ interviews. We used a comparative case study approach. This design provides the opportunity to incorporate a broad range of variables and contextual factors. Case study research provides rich data, and is suitable for developing and refining theory. Document analyses and interviews were used to collect the data. First, we collected background information about the organization by analyzing annual reports, strategic plans, HR plans, and other HR documentation of JS KTG as following: − Common catalogue of JSC NC “KasMunaiGas” and its affiliated companies job positions; − JSC NC “KasMunaiGas” and its affiliated companies operating instructions on rating employees positions and professional occupation by occupation categories and groups; − Company unified form of job description; − Rules of JSC NC “KasMunaiGas” organizational structure and staff listing developing, coordination and approval; − JSC NC “KasMunaiGas” professional standards developing plan; − JSC NC “KasMunaiGas” youth policy; − Standards rules of competitive selection for the vacant job positions and personnel adaptation in JSC NC “KasMunaiGas” − Standard policies of KTG personnel education and development; − The concept of creating Corporate Education Centre of advance training and retraining of company technical and engineering personnel; − Standard policies of KTG personnel evaluation; − Standard policies of KTG personnel reserve building up and development ; − Job-related instruction on awarding and incentive for company employees. − Policy in the field of office and management personnel compensation in corporate entities, 50% or more of voting shares of which belongs to JSC NC “KasMunaiGas” on the basis of ownership or trust management;

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− Policy in the field of operational personnel compensation and social assistance in corporate entities, 50% or more of voting shares of which belongs to JSC NC “KasMunaiGas” on the basis of ownership or trust management; − Policy in the field of managerial personnel/executive staff compensation in corporate entities, 50% or more of voting shares of which belongs to JSC NC “KasMunaiGas” on the basis of ownership or trust management; − JSC NC “KasMunaiGas” Corporate Social Responsibility Code; − Standard regulations on rendering social support to employees; − Rules/program of rendering social support to company retirees; − Employees housing issues regulating program. Subsequently, within a two weeks period, a total of 14 interviews were conducted in the organization, 4 interviews in HR department, and 10 in other departments. The respondents included HR directors, regional managers, HR managers, other HR department members, on head quarter. Including multiple actors within the organization provides us with diverse viewpoints and more valid and reliable data. The semi-structured interviews were built around open-ended questions that guided the structure of the interview, based upon the proposed operationalizations. Interviews covered strategic aspects, HR formulation and implementation, HR practices and relationships between them. Examples of starter questions are: "Who is involved in strategy formulation?", "How much freedom do HR managers have to adjust HR strategy to their unit?", and "Could you describe how the HR system is implemented?". Followup questions were asked to go deeper into the subjects. In addition to the general questions, the interviews also focused on major changes that occurred in or around the organization during the previous five to six years, and their effect on HRM and fit. By focusing on change, the complex interactions between HR practices and their dynamic nature become more visible. The interview approach was pilot tested by the researchers before starting these cases.

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Interviews were conducted by researcher, lasted between 15 and 30 minutes and were and transcribed. The content of the interviews was summarized in case study descriptions, which were checked for accuracy by the employees involved. Findings Links between elements of strategy and HRM: content. In JSC KTG, the mission "the energy of peace and well-being" is not applied to employees; the HR mission is not articulated, but focus on employee development and involvement is seen. The organization is strategically complex as it combines different product groups and processes. A 'promotion from within' policy is followed. Employees who already work for the organization are trained to perform management jobs, because the uniqueness of the organization implies that managers from outside the organization are seen as less likely to succeed in JSC KTG: "Gas transportation is a complex industry. You need experience in the sector in order to succeed in KTG. Socialization and getting acquainted to the sector takes time." (HR director,) It's assumed that every employee of the company has the right to apply for a higher position in the organization. Starting from introduction in 2002, the relevant Programme “Personnel Reserve” has provided JSC KTG employees with an opportunity to compete for available vacancies. The information on new positions is regularly published in corporate newsletter and is available through on-line information service. One of the key questions of HR management in terms of the work with executive personnel at the company's branches is to identify and train the selected candidates to be promoted for top executive positions, i.e. the group of candidates, who along with strong professional level have to demonstrate individual initiative, determination, readiness to further education, etc. The selection and evaluation process is contracted to independent consultants with respectful track record in the field of personnel assessment and selection in other industrial companies. The candidates shortlisted into the personnel reserve programme have to attend special trainings and seminars, to further develop basic 133

managerial skills, knowledge of the foundations of executive and financial management. But, the firm does not focus on working together to achieve organizational goals. In the business plan, strategy elements are not translated into specific HR goals. Recommendation: implementation of an 'appraisal cycle' in the JSС KTG based on this translation of business goals, consisting of three meetings for each co-worker: − During the first meeting of the 'appraisal cycle', concrete appointments are made about the co-worker's contribution to the organization and department goals. − The second meeting checks progress towards goals. − A final meeting later in the year serves to evaluate performance. Thus, the appraisal process could be directly linked to company objectives. In JSС KTG, culture forms a linking pin between strategy and HRM. Organizational culture refers to a pattern of shared basic assumptions. These shared norms and values play an important role in organizations. Strategy is translated to 'culture keys' or 'core values' that reflect desired employee behaviors needed for the strategy to be successful. These culture elements act as guiding principles for the HR system. The basis for successful activity of JSС KTG are the corporate values and standards that are designed to provide trust and respect to business community, partners, representatives of the government and all those on whom the success and prosperity of JSС KTG are depended. They cause a sense of pride to workers of JSС KTG and desire to achieve the best results at their work. Honesty and impartiality are the basis of JSC KTG activity and business reputation. JSC KTG tolerates no conflict between personal and professional interests. Deception, concealment and false statements are incompatible with the status of a JSC KTG officer or an employee. Responsibility is the guarantee of JSC KTG performance quality. In summary, we found that JSС KTG translates business strategy into HR strategy and HR practices, in which culture elements reflecting desired employee behaviors play an important role. 134

But, the firm does not focus on working together with employees to achieve organizational goals. In the business plan, strategy elements are not translated into specific HR goals. The role of HRM in strategy formulation: process. In JSС KTG, the HR manager is not a member of the management team, and is not involved in major decisions. Within the different regions, the regional manager and the HR manager do not work together as a team in implementing and achieving business goals: "There is no contact between the HR manager and the regional manager … HR advisors are not involved in issues linked to the financial results." (HR department member). HR director is not a member of the executive board at corporate level. As a consequence, HR is not involved in making major organizational decisions. The role of HR here is to support and implement strategy and strategic changes decided by the management team. Recommendation: the process of linkage of strategy and HRM should be strong: all HR managers should be members of the MT of their organizations, and at firm level the HR director should be also a member of the corporate MT. Strategy and HR strategy formulation should be integrated. In strategic business planning, these functions are considered interrelated. This is also should be reflected in the business plan, in which strategy and HR goals will be mentioned simultaneously. Moreover, HR should initiates important changes in the organization Implementation of the HR strategy JSС KTG Personnel department has no a clear process or guidelines for the strategy implementation. Department mainly formulates end goals, without providing guidelines for how to achieve those goals. Implementation of HR is seen as a challenge in organization. Most line managers in place have not been selected based on management or HR skills, which may explain why they differ in their performance as a manager. For example, the supervisor’s signal:

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"Some line managers have 'their own way' of implementing HR practices, which contradicts HR policy." (supervisor, financial department) "The execution of the 'attestation' is difficult. During the last 3 years, 50% of the employees has had only one appraisal meeting, and some employees had no meetings at all. " (HR manager) JSС KTG mainly uses a top-down approach. The HR strategy and system are developed by HR director or HR managers, and then introduced to employees. Employees are not consulted during this process. A HR department member comments: "Often, HR practices are well designed, but poorly implemented. We often signal these flaws early in the implementation process. They should have asked our advice." (HR department member) Recommendation: Developing employees' commitment to the new practices is stressed during implementation. JSС KTG should use a different approach, involving employees in strategic planning. Employees must have input in goal setting for the organization and their department. Their suggestions must be collected during departmental meetings, and their manager should present these ideas to the JSС KTG MT. Thus, a bottom-up process should complement the top-down implementation process. In JSС KTG implementation of HR strategy is a challenge. Thus, MT is recommended to involve employees in developing and implementing HR practices, adding a bottom-up process to the top-down implementation. This increased involvement could lead to fewer problems with acceptance. Internal fit The strength of interaction between HR practices. We found evidence that JSС KTG HR practices are developed and implemented based on the content of the other HR practices (JS NC KMG personnel policy) in place (an additive relationship). Employees are selected, trained, evaluated, and rewarded not based on the needs of the organization. But, in JSС KTG, individual goals are not set based on the contribution an employee can make to departmental goals. Employees are not trained to be better able to contribute to these goals, and are not evaluated and rewarded based on the accomplishment 136

of these goals. Therefore, no integration with other HR practices is seen. Thus, if any, an additive rather than interactive relationship between this practice and other HR practices is likely. "Training programs are not compulsory for employees. However, the manager makes clear that it is the responsibility of the employee to not do the training and risk lower performance appraisals”. (HR manager) Recommendation: JSС KTG HR department should map the level of employees' skills and knowledge relative to the desired level in an employee planning system. Employees should be advised training based on the gap between current and desired skills, and they must be appraised on their progress. New employees should be selected in order to fill a gap in knowledge or skills in the JSС KTG. Another voluntary tool is the 'Talent Guide'. This instrument could be designed for all employees who want to develop themselves. It provides an overview of the competencies and opportunities for each job, linked to culture elements. Competencies for a function are explained and suggestions are given for developing these competencies by attending training or by training on the job. Another way to develop this competence the 'Talent Guide' proposes is attending internal 'pro-activeness' training. In summary, we found there is no integration of HR practices in JSC KTG, although not all HR practices were linked effectively and synergy would require stronger links. Our recommendation, JSC KTG HR department should develop program of integrated HR practices, where HR practices are clearly defined, linked and interactive. The degree of consistency of HR systems for different employee groups The Company continually works on establishing the HR Pool of managerial and administrative positions of KMG Group from specialists of KMG Group motivated to carrier growth with a high level of professional expertise and managerial competency.There are specific HR practices for this group that have one dominant goal: preparing the potentials for a management function. The potentials are evaluated on specific goals and are rewarded differently. 137

Organization distinguishes between higher level jobs which are mainly management functions, and lower level jobs on operational level. These two groups have different working conditions as a result of different Collective Bargaining Agreements, and separate training and development opportunities, adjusted to the nature and level of the job as incorporated in separate parts of the 'Talent Guide'. In summary, although in JS KTG no core employees were identified, specific employee groups were recognized by organization. In particular, JS KTG HR department has designed a consistent HR system for a specific potentials group, where all HR practices support the goal of preparing them for a management function. Still inconsistencies in the HR practices within both higher and lower level employee groups exist. Adaptation to organizational or environmental changes Recommendation: Within the turbulent, high-pressure market, organization has to cope well with changes. JSС KTG HR strategy should be developed to increase efficiency and effectiveness, as a response to market pressures. HR practices should be adjusted step by step in order to accomplish this goal. For example, new training programs could be introduced focusing on planning, working efficiently, selfactivation, and working proactively. Addressing multiple HR practices simultaneously will help maintaining the consistency and internal fit of the different HR practices as they were adapted to the new situation. These continuous changes have a major impact on the organization, and JS KTG should stress a change-driven culture. Core values must reflect agility and flexibility, for example, through antihierarchy, simplicity, and togetherness. HR practices should be adapted to this culture, and aim to select and train flexible employees who fit in this culture of change, responding to pressures, which are translated into HR changes. JSC KTG can be seen as more proactive in its approach and the continuous change philosophy permeates strategy, HR practices and culture. Discussion The aim of this section was to contribute to the development of ways to operationalize strategic and internal fit, and to assess and 138

evaluate these alternative models through JSC KTG case analysis. We added adaptation to capture the dynamic process involved in achieving strategic and internal fit. We found that organizational culture is an important driver for. Besides forming a dominant goal, culture also forms a strong link between strategy and HRM, which suggests a close link between strategic and internal fit. Further exploring these relationships between strategic and internal fit seems of interest for future research. The administrative heritage of an organization, consisting of historical and cultural aspects of the organization, as well as institutional factors may constrain adaptation. The different elements within the models of strategic and internal fit are not completely separate. Using our operationalizations implies not just additively combining the scores of the different elements; these elements should be regarded as interrelated. For example, internal fit suggests that HR practices forming powerful connections support and enhance each other in achieving certain goals. In other words, 'strength of interaction' and 'alignment with dominant goals are linked in this respect. In our operationalization of strategic fit, we expect that the role of HRM in strategy formulation is associated with the extent to which there are links between strategy and HRM. In other words, integration of strategy and HRM processes seems to enable integration of the content. Moreover, the relationship between the elements of strategic fit might be conditional; without a good score on HR strategy implementation, a high level of strategic fit might not be possible. We tried to demonstrate that using a combination of these elements for measuring fit leads to a deeper knowledge of strategic and internal fit than measuring only one of these. By combining different elements in operationalizing these forms of fit, we were able to give more insight in the complex and dynamic nature of fit. We introduced adaptation as a dynamic component to achieve strategic as well as internal fit. Although usually theorized on and studied separately, our findings suggest that adaptation can contribute to the integration of strategic fit and internal fit. A 139

proactive approach to change requires a close integration between strategy and HRM processes and content. When changes occur in the organization or its environment, the strategy as well as the dominant goal of the HR system may change. This leads to alterations in HR practices that help to pursue the new goals. Yet, these adaptations need to be carefully designed in a way that practices still support and enhance each other, and shaped such that consistency over time is achieved. Our evidence suggests that adaptation - provided it takes place in a proactive way - stimulates the interaction between both strategic and internal fit, and in this way generates stronger fits. This way, the concept of adaptation gives a first insight in synergies that may occur when strategic and internal fit are aligned. Our framework is particularly useful for gaining comprehensive insight in the nature of strategic and internal fit in a comparative analysis of two or more organizations. More research is needed to further develop and test the proposed operationalizations, and to validate this framework. In a follow-up stage, potential performance effects of strategic and internal fit could be explored. Conclusion In this section, alternative operationalizations of strategic and internal fit were presented, and evaluated using data from JSC KTG. We found evidence for all proposed dimensions of strategic and internal fit and adaptation. A potential limitation concerns the generalizability of the findings on these forms of fit from our case study. Our aim was to search for ways of operationalizing and measuring the theoretical concepts of strategic and internal fit, important in the debate on the link between HRM and performance. Using JSC KTG case study we have explored and assessed the value and applicability of our way of operationalizing these two theoretical constructs. Future research is needed to determine whether our findings are indeed also generalizable to other types of contexts. In sum, we aimed to contribute to developing alternative operationalizations for strategic and internal fit. The operationaliza140

tions we developed provided insight and may create opportuneties for further research on strategic and internal fit. Future research could further develop and test these operationalizations of strategic and internal fit and their potential impact on firm performance, both in qualitative and quantitative research. Data collection in other sectors and contexts could increase knowledge about strategic and internal fit. Research is also needed on other forms of fit that potentially affect HRM in its relation to performance, such as organizational and institutional fit. 3.2. Role of Human Resources Management Practices in creating employees’ job satisfaction and organizational commitment Organizational commitment has been considered as one of the most important predictors of turnover and intention to leave. It was found that employees who were more committed to their organizations had lower intention to leave than those with lower organizational commitment. Wong, et al., studied about a relationship between three attitudinal antecedents to turnover, OC, job satisfaction and turnover intention. Upon examination of their full model to determine the relationship between the attitudinal antecedents, they found that OC significantly predicted turnover intention whereas job satisfaction had no effect on turnover intention. The finding suggests that employees who are committed to an organization are less intended to leave their employers [122]. In a study to determine a relationship of organizational commitment and job satisfaction with intention to leave among government doctors, Samad found that OC contributed the highest variance in intention to leave [123]. Human resource management (HRM) practices have been considered as one of the critical factors affecting OC. Kinicki, et al. proposed that an organization’s actual HRM programs affect employee perceptions of an organization’s commitment to human resource efforts, which in turn affect employees’ work attitude [124]. In Wright and Nishii's model, the effects of HR practices on employee attitudes and behaviors occur via employee perceptions of HR practices. Not the HR practices as intended, but 141

rather how employees experience HR practices is supposed to have a strong effect on employee outcomes. These perceptions might also affect employee performance [125]. Although perceived HR practices are proposed to have a strong association with employee outcomes, not many researchers have actually tested this relationship. Instead, research has focused on the effects of actual HR practices or systems on attitudes and behaviors or on the role of perceptions of a single specific practice rather than a combination of practices. To take into account these differences in interpretations of HR practices, this study will focus on employee perceptions of a set of HR practices. Many HRM scholars propose that HR practices will affect employee and firm performance through their impact on employee attitudes. As mentioned before, 'high commitment' and 'high performance' work practices have been widely used in research in this area. As the role of HR practices is to influence employee attitudes and behaviors required by the organization, positive effects on attitudinal and behavioral outcomes are expected. Many authors already outline the idea that sets of consistent HRM practices can reinforce employee attitudes and behavior. By HRM practices being internally consistent, employees know what is expected of them and what they can expect in turn. Academic research on the effects of multiple HRM practices often proclaims to study internal consistency by defining sets of congruent HRM practices as a system. More specifically, it is suggested that systems of ‘high commitment practices’ increase organizational effectiveness by creating conditions where employees become highly involved in the organization and work hard to accomplish the organization’s goals. However, researchers study the effects of high commitment HR systems on measures of organizational effectiveness without investigating the relationship between high commitment HRM practices and aspects of employee commitment. Stated is that very little is known about how and through which processes HRM practices influences organizational performance. Intermediate processes that ultimately affect performance outcomes are referred to as the ‘black box’ of the HRM-outcome link. Unlocking the ‘black box’ means identifying HR-objects that are 142

relevant to employee performance. This study identifies the employee’s job satisfaction to be one of the general goals of HRM activities in creating employee commitment to the organization. Wright & Gardner argue that regarding the level of analysis of HRM practices, most research has concentrated on identifying sets of HRM practices at the organizational level by using single respondent measures of sets of HRM practices [126]. But the assumption that HRM practices are invariable across large groups of jobs within organizations is not feasible, as Lepak & Snell pointed out [111]. This suggests that lowering the level of analysis could give a more accurate insight in the variation of sets of HRM practices within organizations and across job groups or (business) units. Additionally, gathering data by using single-responses of HRmanagers on which HRM practices are in place, probably gives no accurate reflection of reality. Such single-respondent measures of sets of HRM practices are subject to, for instance, the respondent’s degree of accurate information. Therefore, Guest and Wright and Gardner have proposed to measure HRM practices through individual employee perceptions, since employees are the focal unit HRM practices aim at [126, 127]. As such, the research project will focus on the perception of employees on HRM practices. It is in the interest of an organization to retain employees and minimize turnover. However, many managers have little understanding of how to satisfy their employees and how these employees’ satisfaction levels influence their intent to leave their positions. In fact, because of this limited understanding, managers’ efforts towards employee satisfaction can sometimes create more dissonance than cohesion between employees and management, leading to excessive employee turnover. One significant reason that the cost of turnover is high is due to the high cost of training new employees. One way to address the issue of turnover is to understand the commitment employees have to their operation and to determine what affects these levels of commitment. To do this, we must have a clear definition of organizational commitment and identify variables that might influence it.

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Organizational commitment has been described as consisting of two constructs – affective and continuance. As defined by Mowday, Porter, and Steers, affective organizational commitment is “a strong belief in and acceptance of the organization’s goals and values; a willingness to exert considerable effort on behalf of the organization; and a strong desire to maintain membership in the organization.”[128, p.27] The counterpart to affective organizational commitment is continuance organizational commitment, which considers the idea that individuals do not leave a company for fear of losing their benefits, taking a pay cut, and not being able to find another job. Job satisfaction has been recognized as a component of organizational commitment. It is suggested that job satisfaction is a state of pleasure gained from applying one’s values to a job. Spector believes that job satisfaction “can be considered as a global feeling about the job or as a related constellation of attitudes about various aspects or facets of the job.” Researchers have found that job satisfaction is correlated with turnover but not to the extent that a predictive model can be created. The negative consequences of turnover include: an increase in recruiting, hiring, adaptation, and training; and the disruption of communication, productivity, and satisfaction among employees who stay. The scope of this research focuses upon job satisfaction and its relationship with organizational commitment. Similar studies were sought in reviewing the literature with few found by the researchers. Research questions. The purpose of the study is to examine how HRM practices influence KazTransGas employees’ job satisfaction and organizational commitment; whether perceived organizational support and company’s HRM policies and practices have relation ship with organizational commitment; and whether organizational commitment influence to lower intention to leave. Research questions were created to analyze relationship between company’s HRM practices with job satisfaction and organizational commitment among employees.

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These questions are: 1. Is there any link between HRM practices and employee’s job satisfaction? 2. Do employees’ levels of job satisfaction significantly affect their organizational commitment? HR practices are major mechanisms through which employees come to understand the terms of their employment. HR practices shape a person's experience in an organization, based on personal interpretations and social constructions. In other words, employees who have positive experiences with HR practices are more likely to have a positive perception about their fit with the organization and their jobs. Multiple HR practices, including selection, development and training, as well as appraisal and reward systems, may affect employee’s job satisfaction. Hypotheses 1: there is positive relationship between perceived HR practices and employee’s job satisfaction. Hypotheses 2: there is positive relationship between perceived HR practices and employee’s organizational commitment. Hypotheses 3: there is positive relationship between employee’s job satisfaction and employee’s organizational commitment. To evaluate the relationship between job satisfaction and organizational commitment the JSC KTG employees’ job satisfaction questionnaire was used. The target population for this study consists of employees of JSC KTG. The participants of this study were employees from different departments and represented management and non-management staff. Methodology Survey and sample characteristics. A questionnaires were distributed for collecting data of variables that can empirically lead to employees’ satisfaction and organizational commitment. A survey was conducted among employees of JSC KTG (Astana head office) during years 2010-2011. 250 questionnaires were distributed. The questionnaires were gathered from HR department for the years 2010 -2011. To conduct this study we’ve used JSC KTG employees’

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satisfaction questionnaires results. Each item refers to a reinforcer in the work environment. The respondent indicates how satisfied he or she is with the reinforcer on his her present job. Five response alternatives are presented for each item: “Very satisfied; Satisfied; Neither; Dissatisfied; Very Dissatisfied”. This questionnaire employs questions with all of their responses measured at the interval scaled. A scaled-response form used in this study is the semantic differential scale, which is a modified Likert scale. Measurement scales. According to the Herzberg’s theory of motivation there are two groups of factors, motivation and hygiene, that affect employees’ satisfaction. To measure employees’ satisfaction this study uses three items: employees’ overall satisfaction with their job that range from “very dissatisfy” – 1, to “very satisfy”- 5; extrinsic and intrinsic factors that affect job satisfaction with their range from “very dissatisfy” – 1, to “very satisfy” – 5. The list of perceived HRM items was checked for coverage of the mostly used high commitment/high performance work practices using a review of HRM and performance studies by Boselie et al (2005). Participants were asked to indicate for each item the extent to which they perceive that the organization offers them the HR practice ("The organization offers me…") on a 5-point Likert scale ranging from 1 (not at all) to 5 (very great extent) and included a wide range of practices, such as selection, training, participation, performance appraisal, and rewards. Sample items are "Work that gives me the opportunity to express myself”, and "The possibility for my team to take the responsibility for our results". Factor Analysis and reliability test. A conceptual model was developed to visualize the interrelationships of the variables (figure 12). The model contains motivators (intrinsic): recognition, work itself, opportunity for advancement, professional growth opportunity, responsibility, good feelings about organization; hygiene factors (extrinsic): effective senior management, effective supervisor, good relationship with co-workers, salary, job security, status, and job satisfaction. The model visualizes the influence of perceived HRM practices on Job Satisfaction and Organizational Commitment. 146

Internal mot Advanc. Achievement Recognition Responsibilit HRM practices Training Hiring Career develop. Perform. Appraisal Compensation

Demogr.factors Age Gender Mar.status Experience Educ.level

J.S.

O.C.

Extern motiv Working cond. Salary Leadersh,style Job security Status

Figure 12 - Hypothesized relationship between job satisfaction, organizational commitment and HRM Remark - The dependent variable in the model is job satisfaction

Factor analysis with varimax rotation procedure was employed to identify underlying dimensions of motivation, job satisfaction factors. Then, the reliability test was used to test the internal consistency for extracted constructs. Scale refinement was done by examining item-to-total correlation to improve the reliability. This led to the retention of four items (alpha = 0.817, standardized item alpha = 0.819) for “HRM practices factor, 3 items (alpha = 0.7414, standardized item alpha = 0.7385) for “Internal Motivation” factor and 2 items for “External Motivation” factor (alpha = 0.5724, standardized item alpha = 0.5753).

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Scree Plot 3,0

2,5

2,0

1,5

1,0

Eigenvalue

,5

0,0 1

2

3

4

5

6

7

8

Component Number

Figure 13 - Scree plot

Measurement and structural model. The Analysis of Moment Structures (AMOS: Arbucle, 1994) was used for an empirical testing of the model, and Maximum Likelihood Estimation (MLE) was applied to estimate numerical values for the components in the model. Confirmatory factor analysis was employed to test the validity of the scales in measuring specific constructs of the measurement model and Fornell and Larker’s (1981) guidelines were applied. To diagnose possible identification problems, the degree of freedom with large standard error variance was used and an identification problem was remedied according to Hayduk’s study. To evaluate the overall goodness of fit of proposed model, the criteria suggested by Bollen were used and measures were selectively assessed as of the following: Chi-square statistics (CMIN), degree of freedom (DF), CMIN divided by DF (CMIN/DF), goodness of fit index (GFI), adjusted goodness of fit index (AGFI), root mean square residual (RMR), normed fit index (NFI). Parsimony ratio (PRATIO), and root mean square of approximation (RMSEA). Results of Data Analysis and Hypothesis Test. The results of the data analysis generally did not achieved acceptable goodness-of-fit, in particular, the indices of GFI (0.660), AGFI (0.521, ) and NFI (0,592). The GFI of 0.660 describes that the goodness of fit of the 148

model indicates about 66 percent fit. The NFI of 0.592 describes that the fit of the proposed model is about 60 percent closer to the fit of the saturated model. The values of the GFI and AGFI can vary from 0 to 1, with values above 0.90 considered as good and values from 0.80 to 0.90 considerate as moderate. For NFI, the closer its values to 1, the better are the fitness of the hypothesized model over the null model. Table 14 − Outputs of structural equation model (SEM) estimates Path diagram proposed model Standardized estimates (S.E.) H1: Perceived HR practices and employee’s job 0.071 (0.033) *** satisfaction. H2: Perceived HR practices and employee’s orga- 0.015 (0.050) *** nizational commitment. H3: Employee’s job satisfaction and employee’s 0.018(0.054)*** organizational commitment. ***p< 0.001 statistically significant at a=0.05 with 95 % confidence interval Fitness measure: Chi-square= 435,921, df= 41, RMR= 0,150, RMSEA=0.268, GFI=0.690, AGFI=0,501, NFI=0.595

Discussion This study investigates the impact of human resource management (HRM) practices on employees’ organizational commitment, and employees’ job satisfaction in JS KTG. The fundamental objective of this research was to study the impact of HRM practices as a critical tool to make employees of an organization more committed to the organization. The contribution of this study was to examine the mediating effects of job satisfaction on the relationship between HRM practices and OC. There were two main goals in this study. The first goal was to examine the influence of HRM practices on employees’ job satisfaction. Second was to examine how job satisfaction affects employees’ organizational commitment. Null Hypotheses 1: “There is no relationship between Perceived HR practices and employee’s job satisfaction” was empirically tested. The results show that causality relationship between Job Satisfaction and Company HR practices is statistically significant 149

(p, 0.001). This suggests that the Job Satisfaction factors cause certain impact on the perception of Company’s HR practices. Null Hypotheses 2: “There is no relationship between Perceived HR practices and employee’s organizational commitment.” was empirically tested. The results of data analysis show that certain causal relationship between Company’s HR practices and Organizational Commitment is statistically significant (p, 0.001). This suggests that the Company’s HR practices factors cause certain impact on the Organizational Commitment. Null Hypotheses 3: “There is no relationship between Employee’s job satisfaction and employee’s organizational commitment.” was empirically tested. The results of data analysis show that certain causal relationship between Organizational Commitment and Job satisfaction is statistically significant (p, 0.001). This suggests that the Job Satisfaction factors cause certain impact on the Organizational Commitment. The hypothesis was supported by the current data. A significant link was found between HRM practices and organizational com mitment. The findings suggest that greater use of HRM practices would make the employees more committed to the organization. The finding is consistent with a study by Edgar and Geare which found significant effect of four HRM practices on OC. The effect of HRM practices in a bundle is important because an organization uses several HRM practices and not a single HRM practice. These findings suggest that HRM practices are important determinants of OC. The findings are consistent with a study by Edgar and Geare which suggests that it is the quality of practice that counts and not the quantity. As suggested by Edgar and Geare HR managers need to conduct regular attitudinal surveys to assess employee reactions to current HRM practices and try to find out what is working and what is not. Conclusion and recommendations The main purpose of the study was to develop a model, illustrating relationships between HRM practices, OC and Job Satisfaction in JSC KTG. The second purpose was to examine the mediating effect of Job Satisfaction on the relationship between

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HRM practices and OC. There have been numerous researches studying the relationship between (1) OC and intention to leave, (2) JS and OC. However, none of these studies has investigated Kazakhstani organizations. The uniqueness of this research was to (1) examine the influence of a bundle of HRM practices on OC, and JS, and (2) the mediating effect of JS on the relationship between HRM practices and OC in JSC KTG. The findings indicate that HRM practices would have an influence on OC, but this effect is not direct, it is mediated by JS. Thus, the finding indicates that employer provided HRM practices do not directly result in high employee commitment, employer provide HRM practices make employees think about the motive of the organization. When employees believe that the organization is displaying its commitment to them and is using the HRM practices for employees’ benefits, then the employees perceive the HRM practices as support from the organization, and these employee perceptions make them more committed to their organization, which in turn will lower their intention to leave the organization. Theoretical contribution. The goal of this study was to bridge the JS and OC fit and HRM theory through enhancing insight in the relationship between perceptions of multiple HR practices and employee attitudes and behaviors. Besides direct relationships between perceived HR practices, JS and OC fit, and employee outcomes, we examined potential mediating as well as moderating roles of JS and OC fit. To our knowledge, no previous studies have tested these relationships in Kazakhstan. Strong relationships were found of perceptions of HR practices with JS and OC fit as well as with employee outcomes. Moreover, evidence was found for a mediating and a moderating role of JS and OC fit in the relationship between perceived HR practices and employee outcomes. The first objective of this research was to make a contribution to the OC literature by studying the relationship between multiple HR practices instead of a single HR practice and OC and JS fit, and by using both OC and JS fit in one study. We tested both the how the set of HR practices and six separate HR practices related to fit. We found significant relationships for the set of practices, suggesting

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HR practices indeed help to match employees both to their jobs and organizations. Of the separate practices, the perceptions of 'participation/autonomy/job design' were associated most strongly with both OC and JS fit, suggesting that the employees' perceived opportunity to be involved in making decisions about their work is important for their perceived match with the job and organization. Recruitment/selection and team working/autonomy were not signifycantly related to OC or JS fit. Employment security and work-life balance were related to OC fit and training/development and performance appraisal/rewards to JS. Practical contribution of the research. Another notable but unexpected result is the significant association between recruitment/selection and OCB. This might result from the design of the study, in which current employees are asked about selectivity in recruitment and selection procedures. A possible explanation might be that people who perceive that selective recruitment and selection procedures are used to hire new employees have a stronger feeling that they are part of a selective community that values the people belonging to it, and in turn they may be more likely to show citizenship behaviors. To measure perceptions of HR practices in this study, respondents were asked to indicate "to what extent the organization offers me…". Thus, the referent of the items is specifically directed to the employees themselves instead of their colleagues or the organization as a whole, in order to capture the individual perceptions. Our findings suggest that employee perceptions of HR practices have strong associations with employee attitudes and behaviors. The results of testing the mediating role of JS reveal that JS fit partially but significantly mediates the relationship between perceived HR practices and OC fit partially but significantly mediates the relationship between perceived HR practices and the job-related outcomes intention to leave and job satisfaction. Two relationships are fully mediated, both by OC fit: the relationship between participation/autonomy/job design and intention to leave, and the relationship between training/development and job 152

satisfaction. Thus, employee perceptions of their (lack of) opportunity to participate and to be involved in decision making do not directly cause people to think about leaving the organization. Rather, such perceptions affect employees' sense of fit with their job, which in turn is related to their intention to leave. The same holds for the relationship between training/ development and job satisfaction, which seems to occur via OC fit. These results suggest that training and development practices help employees to feel better able to meet the requirements of their job and to feel that their needs are fulfilled by the job, which in turn enhances job satisfaction. A compensation effect seems to occur for employees as for these individuals, positive perceptions of HRM seem to help to lower their intention to leave. Again, in line with our expectations a compensation effect of HRM seems to occur for employees with low performance job fit (P-J). The results suggest that for low P-J fit individuals, who are likely to be less successful in their job as their abilities and needs match the demands of the job to a lesser extent, perceiving higher levels of HR practices implies they see that the organization provides opportunities increase skills, abilities, and autonomy which makes them feel more satisfied. The (unexpected) moderating results for P-J fit and satisfaction suggest an opposite relationship. High P-J fit employees, who are likely to have a better understanding of what the organization wants and needs, may better understand the signals that the HR practices send, such that the HR practices have more effect on these employees, resulting in higher job satisfaction. In summary, our study demonstrates that perceptions of HR practices are strongly related to employee job satisfaction and create organization commitment. Moreover, OC and JS fit can add value to current research about the 'black box' between HRM and organizational performance. Our findings show that some relationships between perceived HR practices and employee outcomes appear to be indirect, occurring via JS and OC fit. Our study shows that for existing employees, perceptions of OC and JS fit also significantly relate to employee outcomes. Our study 153

implies that with the use of HR practices, organizations may be able to manage levels of OC and JS fit of employees, and, in turn, this may affect employee attitudes and behaviors. We found that large variation occurs between individuals in their perceptions of the organization's HR practices. Managing these perceptions could be beneficial for an organization as employee attitudes and behaviors are supposed to lead to higher firm performance. Employees might have a different 'deal' than their colleagues regarding primary and secondary benefits of their job, in other words, they might actually receive different amounts of the HR practices (such as development, autonomy and rewards) which leads to differences in perceptions. Other possible determinants of variation in individual perceptions include for example leadership style and personality. More research is needed to examine the causes of variation in employee perceptions of HR practices in order to give organizations more insight in how to manage these important employee perceptions. Limitations of the Study. Although this study made several contributions to HRM research it has several limitations. In this study, employees’ participation was voluntary and was conducted at JSC KTG Astana head office. So, the findings should be interpreted with caution. Although, the sample size in this study meets the minimum requirement for regression analysis, the sample size may not be representative of the population. Therefore, a small sample size is one of the major limitations of this study. Second, data was collected only from one organization in Kazakhstan. A convenience sampling was adopted. Therefore, the findings of this study were not generalizable to the population. The findings were limited to the sample studied. This gives scope for future studies to conduct random sampling and conduct the tests with a larger sample size, so that the findings could be generalized to the population.

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3.3. Training Design Interventions and Implications for the Productivity Effectiveness Training Design Interventions Training design refers to the degree to which the training has been designed and delivered in such a way that provides trainees the ability to transfer learning back to the job. In his address, President of the Republic of Kazakhstan wrote: “We should not forget, however, educating, improving qualification and professionalism of our own workers” [90, p.12]. Among functions in an organization, human resource management (HRM) is seen as an important activity and studies have provided empirical support for the impact of HRM activities on an organization's performance level. According to the training literature, a large proportion of the empirical research on transfer has concentrated on improving the design of training programmes through the incorporation of learning principles. Research has centered on four basic principles: (1) Identical elements; (2) Teaching of general principles; (3) Stimulus variability; and (4) Various conditions of practice [129]. There are several training design factors that influence transfer of training. These are Instructional techniques and learning principles, Self- management and relapse prevention strategies and goal setting. Thus organizations should design their training programmes to include such factors that increase likelihood of transfer. Accordingly, the LTSI (Learning Transfer System Inventory) measures such a factor i.e. transfer design. Trainees are more likely to transfer the training content to the work context when they perceive that the training programme was designed and delivered in such a way that maximizes trainees' ability. One of the reasons why training does not deliver the desired effect may be that it does not suit the needs of the organization. Traditionally the felt needs approach has been applied which simply asks employees to list the training they desire. A systematic approach to TNA includes at least the determination of job requirements, required skill levels and the current skill levels of the employees involved. It is also observed that investigation directed at building a contingency model of transfer-oriented training intervention design would provide information important for developing training 155

environments more conducive to positive transfer in terms of productivity effectiveness. Identification of training needs, design and implementation of training programmes, transfer of training, and evaluation of programme benefits are key activities in addition to studying general training variables such as types of training, selection of trainees, selection criteria, evaluation instruments etc. The following research model (figure 13) has been developed to study the influence of training design interventions which have been identified based on literature review on the productivity effectiveness. Training Need Analysis Productivity Effectiveness

Training Designing and Implementation

Figure 14 - Research model Remark Compiled by author

The objective of the research is to gain insights into: Major driving forces of training programme in JS KTG. The JS KTG training practices such as types of training; selection criteria etc. JSC KTG Training Need Analysis (TNA) and Training designing and Implementation process (TDAI). The JSC KTG training evaluation practices and instruments used. Methodology. The Primary data is collected for the purpose of the study using questionnaire at the first stage and interviews at the second stage. The study covers 38 representatives from different unit-level of JS KTG. The research instrument used for the study is a well constructed questionnaire. The questionnaire was pretested before the survey. The questionnaire was personally administered to the HR heads of the JS KTG. The data is analyzed using statistical tools and techniques with the help of SPSS. Major Driving Forces of the Training and Development Programmes. The successful adaptability to the changing environment and conditions depend upon realization of the importance of 156

underlying forces that call for change in the training and development strategy. The major factors that drive JSC KTG units in conducting training and developments programmes are displayed in table 15: Table 15 − Major forces driving training Driving forcers

Disagree

Neither agree nor disagree

Agree

Strongly agree

Popularity Rate (%)

Rank

2 2

3 4

4 6

5 11

6 7

7 79.7

8 1

5

2

5

12

6

76.7

2

Global 3 4 Competition Need to 6 2 change organization culture Pressure for 6 3 increased quality, innovation and productivity Needs, wishes 11 1 and demands of employees Demands and 12 4 directives of top management Remark - Source: Field survey Compiled by author

6

13

4

76.6

3

1

15

6

73.3

4

2

14

5

70.1

5

2

11

5

59.1

6

1

9

4

46.6

7

1 Increased domestic Competition Changing business Strategies

Strongly Disagree

The results indicate that the increased domestic competition, changing business strategies and global competition are the major 157

driving forces that influence training and development activities of the respondents. The changes in the global and domestic environment have forced them to change their focus from treating worker’s training and development as a routine activity to major catalytic activity in order to meet the global standards of production and quality. The globalization, increased competition, innovation, customer’s quality consciousness, legal and environmental compulsions have forced them to revamp their production system. It necessitated a turnaround in the functioning styles of the JSC KTG to change their attitude and approach towards production, quality of products, workers, and customers. Due to increased pressure for quality, innovation and productivity, there is a change in their thinking towards training and development. More than domestic competition, it is the global competition which has led to according due recognition to the sharpening of the knowledge, skills and attitudes of employees. While designing training programmes, worker's wishes, needs and demands have also been given due importance to fulfill their skill requirements to better their performance. Types of Training Programmes Conducted. The traditional production methods and practices have been replaced with world class production activities. As the global market demands these units to obtain various certifications such as ISO- 9000, ISO- 12000, OHSAS, Quality management system ISO/TS 16949 etc., have led to the introduction of various training programmes like TPM, 5'S', 7 tools, Lean Manufacturing, and TQM which are mainly concerned with the world class production practice standards introduced by the Companies like TOYOTA and now practiced worldwide. Oil and Gas industry has successfully taken up the challenges posed by changes in the production standards. The table 16 displays current trends in the training and development programmes conducted by JSC KTG.

158

159

Almaty city

Almaty city

Almaty city

Almaty city Astana city

Company personnel quantity optimization

Compensation system optimization

Juridical technique of business correspondence, presentations, prepetition claims and contracts preparation

Managerial audit 1

Oil agreements and contracts

Corporate management in public company

Hedging and derivative techniques

1

2

3

4

5

6

7

1

Hong-Kong

Almaty city

3

2

April, 21 – 25

April, 19-20

April, 16 - 20

April, 11 - 20

April, 9 - 13

April, 12-13

April, 10-11

4

Conducting tine

Professional training

Training location

1

Training title

Table 16 − Types of Training Programmes

1 person

4 persons

1 person

1 person

1 person

1 person

1 person

5

Participant number

Obligatory

Obligatory

Obligatory

6

Presentation

160

Moscow city

Almaty city

Modern technologies of hydrodynamic drill-hole surveys

Practices of making, alteration and canceling commercial contract agreements

9

10

Astana city

Almaty city

Globalization of competitiveness

Qualified technical and support personnel training and retraining system management and finance

Projects financial appraisal and analysis. Project target costs

13

14

16

2

Astana city

Strategic HR

12

Astana city

Almaty city

Transition to the paperwork management in state language. Documenting, paper administering and document custody in organizations

11

Almaty city

Taxes and law

8

May, 28 – June, 1

May, 23

May, 22-23

May, 14 – 18

May, 14 – 18

May, 15 – 17

April, 24 – 27

April, 23 -27

1 person

1 person

2 persons

1 person

1 person

3 persons

1 person

1 person

Obligatory

Obligatory

Obligatory

161

Taxes and law

18

19

3

40 persons.

2 persons

Total: 101days Average education fee – 198 340,60 tenge/person (including travel allowances) Remark - Source: KTG training analysis report, 2011

Almaty city

May, 28 – June, 2

1 person

3 persons

3 persons.

2 persons

"Certified financial analyst" earning degree cram

22

Almaty city

June, 21 – 25

May, 30 - June, 03

May, 29 - June, 1 июня

April - June,

«International remuneration package GR7, Strategic communication and aggregated reward GR9».

21

Professional certification

Business trainings

Paris

Mandatory insurance of employer and danger facilities owners responsibility, environmental insurance and world practices modern technologies Astana city

Astana city

World bank apprenticeship course on project monitoring and appraisal

17

Obligatory

The survey reveals that the JSC KTG conduct about 22 types of training programmes like Cost reduction, Time management, Workers orientation programmes, Taxes and law etc., with an emphasis on the participation of workers in all the programmes. The unique programmes among them are listed in table 16. Modern technologies of hydrodynamic drill-hole surveys training is conducted by 80 percent of the respondents with an objective of boosting the quality image of the products manufactured by these units. Qualified technical and support personnel training and retraining system management and finance training programmes are also adopted by 80% of these industrial units as a part of lean manufacturing practices. «International remuneration package GR7, Strategic communication and aggregated reward GR9» is also imparted to the workers employed in these units. These training programmes have led to the improvement of production practices on par with the world standards. Trainee Selection Criteria .The selection criterion of workers for participation in training programme also impacts the morale of the workers. An objective selection criterion ensures an equal opportunity for all the workers to participate in training program-mes. The study reveals that the selection criteria are not based on traditional criteria like seniority or merit alone. Majority of the departments select workers based on different criteria. The table 17 displays the various criteria used by the human resource management department in selection of the workers. As in table 17, 36.7 percent of the respondent organizational units follow seniority as the selection criterion; 26.7 percent of the units select on the basis of merit alone; 63.3 percent of the departments follow the need based criterion to select the workers to attend the training programmes; 23.3 percent of the units use performance appraisal reports to select the workers to attend the training programme and 43.3 percent of the units use Skill-gap analysis to select the workers to undergo training.

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Table 17 −Selection Criteria Criterion Seniority Merit Need based Performance appraisal reports Skill-gap/Skill matrix analysis Remark - Source: Field survey Compiled by author

Frequency 11 8 19 7 13

Percent 36.7 26.7 63.3 23.3 43.3

Training Need Analysis (TNA). The Training Need Analysis is a significant first step in the successful designing and implementation of training programmes. TNA is a primary phase in the designing and development of training programmes. Such assessment captures information spanning where and why training is needed (organization focus), who needs to be trained (person focus), and what must be incorporated as program content (task focus). Conducting systematic needs assessment can significantly impact the overall effectiveness and quality of training programmes. Furthermore, the information generated during TNA allows for datadriven decisions surrounding the design, development, and delivery of training content, as well as criterion development for evaluation purposes. Arthur reported that only a few studies on training included a needs assessment (only 6% of all the data points in their meta-analysis). The following instrument is used by the researcher to assess the effectiveness of the TNA carried out by the respondent units. Five-point Likert scale is employed with anchor ratings where 1= Strongly Disagree, to 5= strongly Agree. The perceptions of supervisors and HR managers have been presented in table 18. The statement 'We determined the knowledge, skills and attitudes an employee must have in order to perform the job successfully has the highest mean score of 4.30, and 0.98, and the statement 'We decided on the desired competency level we expected an employee to reach after training' has the least mean score of 3.83 and standard deviation 0.79.

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Table 18 − Mean Score and Standard Deviation for TNA Factors Before considering training, we carefully assessed if the problem could have been somewhere else (such as work environment) The job description of the employees' job was reviewed prior to deciding on the training programme to be undertaken by the employees Training was consciously linked to the company's strategic plans We decided on the desired competency level we expected an employee to reach after training We determined the knowledge, skills and attitudes an employee must have in order to perform the job successfully The current skill/competency requirements were ranked according to their importance The current skill/competency level of employees was assessed prior to deciding on the training programme to be undertaken by the employee Average Mean score and standard deviation Remark - Sources: field survey Compiled by author

TNA Mean-score 4.03

Standard Deviation 0.71

3.93

0.90

4.00

1.05

3.83

0.79

4.30

0.98

4.16

1.01

4.03

1.09

4.00

0.932

Training Designing and Implementation (TDAI). The intended impact of training is contingent upon how training is strategically and collaboratively designed. Stober has observed that training improves productivity. Krishnaveni et.al. (2008) have observed that organizations determine training objectives based on training needs identified. The identified training objectives form the basis for the design and development of training methods and materials, identification of trainers and techniques and criteria for measuring and evaluating effectiveness of training programmes. Having organized the above, organizations implement training programmes, ensure transfer of training and evaluate the effectiveness of training programmes. Since TDAI exercise is a vital step in the entire 164

gamut of training and development activities, it must be carefully thought through so as to ensure; 1) Content of training is consistent with job requirement; 2) Development of training task that is similar to actual task. Thus, it is hypothesized as under; There is no difference between TDAI and Productivity Effectiveness of training. The following Five-point Likert scale instrument is used by the researcher with anchor ratings, where 1= Strongly Disagree, to 5= strongly Agree. The mean score and standard deviation of TDAI activities are as under. As in table 19, Statement 'The Training calendars are prepared' has the highest mean score value of 4.36 and standard deviation 0.85. The statement 'Innovative training practices are adopted' has the least mean score value of 2.63 and standard deviation 1.629. Table 19 − Mean Score and Standard Deviation for TDAI Factors

Mean-score

The training programmes have measurable objectives. The training calendars are prepared Adequate training manuals are prepared and distributed in advance Training programmes are modified to reflect changing participant needs Training programmes are scheduled to the convenience of the participants Training programmes are routinely built on expert knowledge and best practices Multiple unit, departments or divisions are involved in design and implementation of training programmes Innovative training practices are adopted Average mean score and standard deviation Remark - Sources: field survey

4.23

Standard Deviation 0.56

4.36 3.90

0.85 1.09

3.93

0.90

3.56

1.07

4.16

0.69

3.73

0.90

2.63 3.81

1.63 0.948

Training Evaluation. The question of what to evaluate is crucial to the evaluation strategy. It is necessary to determine the ef165

fectiveness of a training programme. Evaluation of training programmes can be carried out using any of the following four levels of evaluation. Reaction: It helps in measuring the reaction of the employees to content, relevance, trainers' approach etc., of a training programme attended. Learning: It helps in measuring the extent of learning by the trainees after attending the training programme. Behavior: This reflects the changes in the behavior of the employees in job performance. Results: The results of training is measured to know whether there is a positive change in the labor turnover, improved safety, higher productivity, decrease in employee grievances, effective utilization of machineries, reduction in defectives etc. The table 20 displays the various evaluation criteria used by the respondent units for evaluating their training programmes. The table 20 indicates various evaluation criteria used by the respondent units to evaluate the training and development practices. 70.66 percent of the respondent units use the learning and organizationnal results criteria for evaluating the training programmes. 70 percent of the units use job-behavior criterion, 63.33 percent use Reaction and 10.66 percent units use all the four criteria. Table 20 − Evaluation Criteria Evaluation criteria Reaction to training Learning Job-behavior Organizational Results All the above Remark - Source: Field survey Compiled by author

No of units 19 22 21 22 05

Percent 63.3 70.6 70.0 70.6 10.66

Evaluation Instruments. The evaluation instruments are the means used to evaluate the outcome of training programmes. There are various instruments used by the organizations for evaluating the training programmes. They are 1) Questionnaires, 2) Attitude surveys, 3) Pencil-and paper tests, 4) Performance tests, 5) Interviews, 6) Observations, 7) Performance Records. 166

A judicious use of the instruments helps in discerning the outcomes of training programmes. The following table shows the evaluation instruments used by the sample industrial units. As in table 21, 80% of the sample units use questionnaires; 50% of the units use observations; 30% use attitude surveys and performance tests, and 23.3% units use performance records to evaluate the training programmes. It can be inferred from the above table that majority of the units carry out evaluations using questionnaires which may not be adequate enough to know the results of the trainings. Various effective instruments like performance tests, performance records are not used to assess the outcome of the training. The industrial units need to use these evaluations instruments to assess the outcome of a training programme. Table 21 − Evaluation Instruments Evaluation Instruments Questionnaires Attitude surveys Performance tests Interviews Observations Performance records Remark - Source: Field survey Compiled by author

No. of Companies 24 9 9 8 15 7

Percent 80.0 30.0 30.0 26.7 50.0 23.3

The Productivity Effectiveness (PE) of Training. The existing literature proposes different models for carrying out training evaluation. The one that Kirkpatrick developed at the end of the 1950s, called the 'Model of Four Levels' or 'Kirkpatrick's model can be highlighted. This is the most widely used model by the organizations and most widely referenced in research studies. The first level measures workers' opinion and satisfaction with the training activity. The second level corresponds to learning evaluation. The third level evaluates job-behavior, and the fourth level evaluates the business results such as productivity increase, cost reduction, quality improvement etc. In the present study, the researcher has used the fourth level of evaluation i.e. organizational results in terms of 167

productivity effectiveness to study implications of training design interventions for the productivity effectiveness of training. The following five point Likert scale instrument is used by the researcher with the anchor ratings 1= Strongly Disagree, to 5= strongly Agree, to ascertain the perceptions of the HRM heads about the Productivity effectiveness of the training. The mean-score and standard deviation of productivity effectiveness are presented in table 22. The HRM managers have agreed that the training has considerably helped the management in attaining a higher production volume, reduction of wastage of materials, and effective utilization of machineries. They also agree that training has not significantly contributed to the reduction of costs of production and the effective utilization of equipments. Table 22 − Mean Score and Standard Deviaton of PE Factors

Mean-score

Considerably reduced waste of materials

4.06

Standard Deviation 0.69

Helped attain a higher production volume

4.13

0.77

Helped in efficient utilization of cost savings Helped in effective utilization of equipments Helped in effective utilization of machineries Average mean score and standard deviation Remark Source: Field survey Compiled by author

3.97

0.80

3.93

0.90

4.00

1.05

4.02

0.84

Testing of Hypotheses. The following null and alternative hypotheses are postulated and tested using multiple correlation and regression analysis: Firstly, to examine the relationship between TNA and PE, the following null and alternative hypotheses are formulated: H0 : There is no difference between TNA and PE. H1 : There is a difference between TNA and PE

168

Secondly, to examine the relationship between TDAI and PE, the following hypotheses are formulated: H0 : There is no difference between TDAI and PE H1 : There is a difference between TDAI and PE The correlation coefficients between the independent and dependent variables are presented in table 23. Table 23 highlights that there is a very insignificant relationship between TNA and PE as R=0.051 and p>.01, but there is a significant relationship between TDAI and PE as R=0.575 and p