International Journal of Academic Research in Business and Social Sciences

May 2013, Vol. 3, No. 5

ISSN: 2222-6990

The Effectiveness of Strategic Human Resource

Management Practices on Firm Performance in the
Malaysian Insurance Industry
Leap-Han Loo
Ph.D Candidate, Faculty of Economics & Administration, University of Malaya, 50603 Kuala
Lumpur, Malaysia.
Email: michael.loo@hotmail.com

Loo-See Beh
Associate Professor, Faculty of Economics & Administration, University of Malaya, 50603 Kuala
Lumpur, Malaysia.
Email: lucybeh@um.edu.my
Abstract
This study sought to investigate the relationship between SHRM practices and firm
performance. A descriptive survey research design was used to gather primary data using selfadministered questionnaire. The study population (n=312) was comprised of non-executives,
executives, managers, and top management from seven major insurance firms at headquarter
in the Klang Valley. The study found that performance appraisal, internal communication,
SHRM alignment in the organization, and career planning were the best predictors of firm
performance.
Keywords: Strategic Human Resource Management, Competitive Advantage, Firm
Performance.
Introduction
The perceived level of productivity and customer service provided by the insurance industry in
Malaysia has deteriorated due to lack of skilled and competent workforce. Organization today,
specifically insurance industry is aware of the importance of strategic human resource
management (SHRM) as the leading indicator in achieving improved sales growth and the
creation of innovative insurance products. Therefore, local insurance firms have to be more
efficient, productive and innovative on its SHRM practices implementation that is closely
aligned to the firms objective, business needs as well the culture to sustain competitive
advantage in the market. The contribution of this paper to the literature is twofold. First, the
conceptual model of the study tested the relationship between SHRM practices and firm
performance at the organizational level. The second contribution is to demonstrate the impact
of the strength of the SHRM practices on firm performance.
Background of the Study
The impact of globalisation, market force and highly competitive markets has forced the
insurance industry to be competitive (Kundu & Malhan, 2009) in order to sustain in the market,
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locally and internationally. A high level of skilled and competent workforce can contribute to
the firms success by developing a comprehensive and internally cohesive human resource
management (HRM) system that is embedded in the organizations structure and culture (Liu et
al., 2007). A synergistic HRM system is a pathway through which the firms human capital has
the potential to become an important source of competitive advantage and to enhance firm
performance (Boxall & Purcell, 2003) by shifting their focus to making service quality,
productivity, product innovation and sales growth a priority in gaining a competitive advantage.
SHRM generally focus on human resource strategy, integration and adds to the key notions of
strategies (strategic intent, resourced-based strategy, competitive advantage, strategic
capability and strategic fit) (Armstrong, 2007). Literature review shows that organizations
engaging or adopting SHRM will outperform organizations that do not. Given the rapid growth
and development in Malaysia industries, specifically insurance industry, human resources are
considered a firms key internal resource and are increasingly deployed as the source of
competitiveness in an organization. A great number of empirical studies show that the practice
of SHRM has positive relationship on firm performance and also can be the source of
sustainable competitive advantage to the organization (Schuler & MacMillan, 1984; Ulrich,
1991, Wright & McMahan, 1992; Huselid, 1995; Jackson & Schuler, 1995; Bjorkman & Fan,
2002; Collins & Clark, 2003; Guest et al., 2003; Panayotopoulou et al., 2003; Wright et al., 2005;
Hiltrop, 2005; Gooderham et al., 2006; Othman, 2009).
Literature Review
There is little agreement as to which SHRM practices can be considered as strategic in an
organization (Paauwe, 2004; Marchington & Grugulis, 2004). However, there is a broad
consensus that there is a positive link between SHRM and firm performance (Tessema &
Soeters, 2006; Wright et al., 2005; Bjorkman & Fan, 2002; Singh, 2003a; Bae & Lawler, 2000;
Huselid et al., 1997; Harel & Tzafrir, 1999; Huselid & Becker, 1996; Huselid, 1995; Arthur, 1992).
Huselids (1995) groundbreaking study established that a set of human resource practices, also
known as high performance work systems (HPWS) were strongly related to turnover,
accounting profits and firm market value. Since then, many studies have shown similar positive
relationship between SHRM practices and various measures of firm performance such as
productivity and quality in the auto assembly plants (MacDuffie, 1995), accounting profits in the
bank sector (Delery & Doty, 1996), employee productivity, machine efficiency, and customer
alignment and its link with quality manufacturing strategy (Youndt et al., 1996), and profitability
(Guthrie, 2001). The literature review in this study includes only those studies covering multiple
SHRM practices, because the focus is on the HRM system as a whole that promotes overall
organizational performance. The review on measurement of organizational outcomes
(productivity, quality, and service) and capital market outcome (sales growth) is based on Dyer
& Reevess (1995) and Delaney & Huselids (1996) studies.
Review of literatures indicate that essential SHRM practices such as workforce planning (Mathis
& Jackson, 2004; Chang & Chen, 2002), training and development (Khan, 2010; Katuo &
Budhwar, 2006; Ahmad & Schroeder, 2003; Kundu, 2003; Chang & Chen, 2002; Lam & White,
1998; Ngo et al., 1998), recruitment and selection (Khan, 2010; Katuo & Budhwar, 2006; Kulik,
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2004; Ahmad & Schroeder, 2003; Chiu et al., 2002; Lam & White, 1998), performance appraisal
(Khan, 2010; Chang & Chen, 2002; Bernardin & Russel, 1993), career planning management
(Schein, 1996), compensation (Ahmad & Schroeder, 2003; Chiu et al., 2002; Lam & White, 1998;
Ngo et al., 1998), internal communication (Ulrich, 1997; Richard & Johnson, 2001; Geringer et
al., 2002; Oladipo & Abdulkadir, 2011; Osman et al., 2011), and job design (Champion, 1988 ;
Morgeson & Humphrey, 2006) have positive association with firm performance. These practices
capitalise on the strength of the human capital for sustained competitive advantage (Jackson &
Schuler, 2000). Furthermore, these studies also provide an insight to the management and
human resource practitioner to exercise these practices as strategic tool for superior
performance (Khan, 2010).
Akhtar et al. (2008) adopted Delery & Dotys (1996) seven best practices (i.e. training,
participation, employment security, job description, result-oriented appraisal, internal career
opportunities, and stocks/profit sharing) approach to examine the validity of SHRM and their
effects on company performance among 465 Chinese enterprises. The findings showed that
training, participation, result-oriented appraisal, and internal career opportunities were
identified as the core of SHRM that have positive affect both product/service performance
and financial performance. Akhtar et al.s, (2006) findings are consistent with the results study
done by Shipton et al., (2005). On the other hand, Gooderham et al. (2008) conducted a similar
study using a factor analysis of 80 different HRM practices on its relationship with
organizational performance among the European firms. The study shows that training
monitoring, share-options, evaluation of Human Resource Department, profit-sharing, groupbonus, performance related pay have a statistically significant impact on performance.
Furthermore, Ngo et al.s (1998) findings indicate that firms that provide more structural
training and development create more new products, had more satisfied employees and had
higher sales. Fey et al. (2000) also finds that non-technical training, high salaries and
promotions based on merit will have a direct positive impact on firm performance among the
managers while job security among the non-managerial employees.
In summary, the above reviews have unified a list of HRM practices needed for SHRM research
and argued that it is the synergistic effect of multiple HRM practices in SHRM that contributes
to firms performance. Organization needs to develop a human resource system that achieves
both horizontal and vertical integration in achieving competitive advantage. However, there is
no consensus or consistency evidence illustrating what constitutes these HRM systems or
bundles that associated with high firm performance. Further to that, this study also attempts to
better understanding the integration of SHRM practices on firm performance in the Malaysian
insurance industry. By identifying the important components of SHRM practices for
organizational performance, will help us better theorize the nature and impact of SHRMperformance relationship. Therefore, from the literature review, the conceptual model of this
study is presented in Figure 1.

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ISSN: 2222-6990

SHRM Practices
Strategic Human Resource Management
Alignment, Recruitment & Selection, Training
& Development, Compensation & Benefit,
Performance
Appraisal,
Figure
1: Conceptual model
of the studyInternal
Communication, Career Planning, and Job
Design.

Firm Performance
1) Rate of Productivity
2) Quality of services/products
3) Customer Service
4) Sales Growth

Research Methodology
The descriptive research method is used to facilitate the description of the SHRM and firm
performance of seven major insurance firms operating in Klang Valley. The descriptive method
provides logical approach because the data consisted of the perceptions of respondents, which
were gathered through the administered survey questionnaire. This method of data collection
was chosen for this study as it provides greatest anonymity and lowest chance of biasness. The
sample was composed of the non-executive, executive and managerial/top management
employees of seven major insurance firms available in Klang Valley. Permission was granted
from the Life Insurance Association of Malaysia and General Insurance Association of Malaysia
to conduct this survey among its members.
A total of 350 questionnaires were distributed to seven different major insurance firms using
the method of stratified sampling. The response rate is 89%. For the purpose of this study, the
survey questionnaire constitutes three parts. The first part comprises demographic
characteristics of the respondents such as gender, name of organization, age, education, year
of service, designation and total employees. The second part of the questionnaire consists of 64
items which represent eight SHRM practices and rated anonymously by the respondents on a 5point Likert scale of 1 = strongly disagree to 5 = strongly agree. The third part of the
questionnaire measures the firm performance by the following variables namely: 1) rate of
productivity of your company, 2) customer service, 3) quality of products, and 4) sales growth
developed by Dyer & Reeves (1995) and Delaney & Huselid (1996). Respondents were to rate
on a 5-point Likert scale of 1 = very poor to 5 = very good. The Cronbachs Alpha score is
0.87.
The collected data will be analyzed using the Statistical Package for Social Science (SPSS)
Version 19. The analysis of data began with the reliability test for the scales using Cronbachs
Alpha. This is followed by the examination and presentation of demographic profile of
respondents using descriptive statistics. Pearson correlation analysis will be carried out to
determine the relationships between independent and dependent variables. Multiple
regression analysis was used to proof the level of significant in testing the relationship between
SHRM practices and firm performance.

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Results
The results of the demographic characteristics of the respondents show that 57.4% of the
respondents are female while 42.6% of the respondents are male. This implies that insurance
industry in this country gives female preference in the recruitment and selection process. The
study also indicates that the majority of the respondents are aged 31 years and above (80.4%)
implying that age is an important factor in appointment of executives, manager and top
management. These are responsible positions with high accountability and required a great
deal of experience in carrying out their duties efficiently and effectively. A total of 64.7% of
respondents obtained Degree and we can presume that overwhelming majority of the
respondents were well educated in their area of expertise. 60.3% of the respondents have been
in the industry for at least 5 years of working experience. Majority of the participating
insurance firms employ above 200 employees.
Table 1 shows the inter-correlations between measures of SHRM practices describe the pattern
of independent variables are related to the dependent variable by aiming to identify ideal
SHRM practices that complement and reinforcing each other. The Pearsons product moment
correlation coefficient values reveal strong correlations within the SHRM variables as follows: a)
SHRM alignment in the organization and internal communication (r=0.209, = 0.01), b) SHRM
alignment in the organization and career planning (r=0.311, = 0.01), c) recruitment & selection
and training & development (r=0.338, = 0.01), d) recruitment & selection and performance
appraisal (r=0.190, = 0.01), e) recruitment & selection and internal communication (r=0.218,
= 0.01), f) training & development and compensation & benefits (r=0.382, = 0.01), g) training
& development and performance appraisal (r=0.473, = 0.01), h) training & development and
internal communication (r=0.321, = 0.01), i) training & development and career planning
(r=0.407,= 0.01), j) compensation & benefits and performance appraisal (r=0.220, = 0.01), k)
compensation & benefits and career planning (r=0.303, = 0.01), l) compensation & benefits
and job design (r=0.346, = 0.01), m) internal communication and career planning (r=0.408, =
0.01), and n) career planning and job design (r=0.469, = 0.01).

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Table 1 : Correlations between SHRM practices and firm performance

SHRM Practices
1
2
3
4
5
1) SHRM alignment in the 1
organization
2)
Recruitment
and .021
1
Selection Practices
3)
Training
and -.013
.338** 1
Development Practices
4) Compensation and .029
.083
.382** 1
Benefits Practices
5) Performance Appraisal .190** .473** .220** 1
Practices
.259**
6)
Internal .209** .218** .321** .013
.051
Communication Practices
7)
Career
Planning .311** .144* .407** .303** .122*
Practices
8) Job Design Practices
.036
-.106
0.076 .346** -.057
9)
Perceived
Firm .171** .174** .238** .076
.342**
Performance
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

1
.408** 1
.145* .469** 1
.285** .247** .065

The findings also show a stronger and positive correlation between performance appraisal
practices and firm performance (r=0.342, = 0.01) and followed by internal communication
practices (r=0.285, = 0.01), career planning (r=0.247, = 0.01), and training and development
(r=0.238, = 0.01). This implies that performance appraisal has greatest impact on insurance
performance compared with the rest of SHRM practices. Insurance firms view that performance
appraisal management is a vehicle for the continuous improvement of business improvement
via a co-ordinate program of people management interventions (Walters, 1995). However, the
insurances performance had negative correlation with job design practices.
The multiple regression model with all eight predictors produced R=0.254, F (8 303) = 12.93,
p<.000. R value of 0.254 indicates that 25.4% of the variance in firm performance is accounted
by SHRM alignment in the organization, recruitment and selection, training and development,
compensation and benefits, performance appraisal, internal communication, career planning,
and job design and its square. R value of 0.504 indicating a strong relationship between the
independent variables (SHRM practices) and dependent variable (firm performance). Findings
show that the best predictions of an insurance performance are performance appraisal (
=.376), internal communication ( =.201), SHRM alignment in the organization ( =.183), and
career planning ( =.149). These variables explain up to 25.4% of firm performance with
performance appraisal taking the lead.

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Discussion and Conclusion

In this study, we have investigated the relationship of SHRM in enhancing firm performance. It
was discovered that SHRM practices enhances firm performance. The study found that
performance appraisal, internal communication, career planning, training and development,
recruitment and selection, and SHRM alignment in the organization have positive relationship
on firm performance. The results found in this analysis are consistent with the previous studies,
such as performance appraisal, training, and recruitment (Youndt et al., 1996; Singh,
2003(a)&(b); Wright et al., 2005; Cho et al., 2006; Khan, 2010; Quresh et al., 2010; Arumugam &
Mojtahedzadeh, 2011; Boohene & Asuinura, 2011), career planning (Fey et al., 2000; Singh
2003(a)&(b); Quresh et al., 2010; Nayyab et al., 2011), internal communication (Guest, 1997;
Hoque, 1999; Singh, 2003(a)&(b); Erdil & Gunsel, 2007; Gurbuz & Mert, 2011), and SHRM
alignment in the organization (Paauwe & Richardson, 1997; Abdullah et al., 2009; Gurbuz &
Mert, 2011; Ishak et al., 2011; Osman et al., 2011; Pham, 2011). This study concludes that HRM
plays a crucial role in service companies (Schneider & Bowen, 1993) and performance appraisal
practices was high in practice in insurance firms.
Performance appraisal practices are growing as a key role of managing individual performance,
discussing critical success factors in the job, and provide the key inputs to decision on meritbased salary increases, training, and promotion (Boxall & Purcell, 2003). Insurance firms stress
the importance of effective performance appraisal management based on the belief that
everything people do at work at any level contributes to achieving the overall purpose of the
organization. It is therefore concerned with what employees do, how they behave, how they
perform their work, and what they have achieved. The combined impact of performance
appraisal practices will be expected to achieve more to improve firm performance.
The result of this study is persistence with Huselid et al.s (1997) finding concludes that there is
positive link between SHRM effectiveness and firm performance. The practices of SHRM
undertaken in this study are concerned with how people are employed, managed, developed,
rewarded, and taken care of as to achieve competitive advantage through the strategic
deployment of a highly committed and capable workforce. This shows that organization highly
dependent on human resource to achieve high firm performance. There has been a debate by
numerous academicians on the contribution of SHRM practices in firm performance. Lau & Ngo
(2004) argues that a firm can achieves high performance through a universal set of HRM best
practices. However, Schuler & Jackson (1987); Schuler & Walker (1990); Dyer & Reeves (1995)
view that HRM strategy would be more effective and efficient when appropriately integrated
vertically between an organizations business strategy and its HRM policies and practices.
The implications of this study indicate that insurance firm must strategically manage its human
resource practices to achieve maximum performance. Human Resource Personnel should focus
on how to develop and sustain its human resource through effective SHRM practices to
enhance current and future performance of the organization. The HRM system in Malaysia
went through great transformations in the early 1990s and one of the main goals of SHRM is to
ensure that HRM is integrated with the strategy and the strategic needs of the firm in order to
achieve sustainable competitive advantage. Conclusively, the contribution of this study is that
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effective SHRM practices organises the overall organization-level HRM measures with the goal
of gaining competitive advantage through human resources that will lead to high firm
performance.
Limitations and Future Direction
This research has several limitations. The construction of the research questionnaire did not
consist of sufficient items to explore the relationships between SHRM practices and firm
performance. Only eight out of a wide range of possible HRM practices were selected in this
study. Selection of SHRM items were based on the most popular SHRM practices quoted from
previous studies. Therefore, the results of this study may be biased. This study only focused on
the Malaysian insurance industry and the results may differ from other industries in Malaysia or
other countries. This study may be taken up to cover a wider area such as insurance business
unit branches and more respondents with cross cultural extensions. Future researchers may
take up studies on SHRM for these aspects.
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