Examining Strategic Fit and Misfit in the Management of Knowledge Workers

This study advances research on strategic human resource management by examining the importance of alignment between an organization’s HR system and innovation strategy in achieving superior performance. We argue that alternative innovation strategies require different forms of knowledge behaviors from core knowledge workers to deal with the unique knowledge problems underlying exploration versus exploitation innovation strategies. Further, we argue that companies make distinct choices in terms of their HR strategies for managing core knowledge workers, and these alternative HR systems theoretically produce different employee ability, motivation, and opportunity outcomes which support different knowledge search and combination behaviors. We demonstrate, in a field study of 230 software firms, that alternative HR systems support either an exploration or exploitation strategy, and the alignment or misalignment between a firm’s HR system and strategy results in firm performance gains or penalties, respectively. HR Strategy, Innovation, and Firm Performance 3 Knowledge exchange and combination are essential for innovation and firm survival in fast paced industries (Smith, Collins, & Clark, 2005), but not all formal arrangements for managing workers are equally effective in managing required knowledge outcomes (Nickerson & Zenger, 2004). Because alternative innovation strategies require the application of different knowledge (Benner & Tushman, 2002; March, 1991), the question of how firms can foster the required employee knowledge search and integration activities for a given innovation strategy is a critical area in need of further research (Gupta, et al., 2006). HR systems may be key to understanding this question as extant research suggests that firms can gain a competitive advantage when they achieve alignment between the behavioral requirements of their strategies and the role behaviors engendered by the human resource (HR) systems they use to manage core employees (Collins & Smith, 2006; Schuler & Jackson, 1987). We argue that firms that choose an HR system that fits with the knowledge requirements of their innovation strategy will achieve higher firm performance, while those that choose a poor fitting HR system will suffer performance penalties. Theoretical work in the SHRM literature has argued for the importance of vertical fit, the notion that an HR system is more likely to positively contribute to firm performance when the system is aligned with an organization’s business strategy (Delery, 1998; Becker & Huselid, 2006). Prior empirical studies, however, have found mixed support for this “fit hypothesis” (e.g., Delery, 1998). Further, the extant empirical research testing this fit hypothesis is lacking on a number of dimensions. First, prior studies have tended to focus on manufacturing or lowend service firms or on front-line employees (e.g., Arthur, 1994; Fu, Flood, Bosak, Rousseau, Morris, and O’Regan, 2015), ignoring knowledge workers and industries where innovation is at a premium. Second, prior work has tended to compare the effects of a high investment HR HR Strategy, Innovation, and Firm Performance 4 system oriented toward employee development (e.g., the high commitment or high performance HR system) relative to a lower investment HR system that limits resource allocations directed toward attracting and developing employees (e.g., a transactional approach) (e.g., Arthur, 1994; Delery & Doty, 1996; Ichniowski et al., 1997; Tsui, Pearce, Porter, & Tripoli, 1997). Alternatively, extant empirical research has focused on the relative effects of a single strategic HR system in different strategic or industry contexts (e.g., Chadwick, Way, Kerr, & Thacker, 2013; Youndt, Snell, Dean, & Lepak, 1996). Unfortunately, while this body of research helps to establish boundary conditions associated with the appropriateness and effectiveness of a particular investment-oriented HR system, these prior studies have ignored the idea that organizations have the strategic choice between multiple different investment-oriented HR systems, each comprised of HR practices that support the development of unique abilities, motivations, and opportunities (AMOs) of core knowledge workers (Kehoe & Collins, 2008). As a result, this research has offered no insight regarding the relative effectiveness of a highcommitment approach relative to other strategic HR systems. We seek to contribute to the literature on SHRM in several important ways. First, we aim to contribute by explicitly adopting the idea of strategic choice in HR by comparing three alternative systems of HR practices and their effectiveness in satisfying the knowledge requirements of exploration and exploitation innovation strategies. Second, our approach sheds light on the “fit hypothesis” by assessing both a wider range of HR systems and examining the effects of both alignment and misalignment of these HR systems with the knowledge search and 1 For example, such research has established that high investment HR practices may have diminishing positive effects on establishment performance as implementation levels increase (Chadwick, 2007), that the effect of High Performance HR practices on labor productivity may be more positive in firms that are not pursuing a differentiation strategy, when capital intensity is high, when industry dynamism is high, and when industry growth is high (Chadwick et al., 2013); and that a human capital enhancement HR system may be more positively related to performance under a quality manufacturing strategy (Youndt et al., 1996). HR Strategy, Innovation, and Firm Performance 5 combination behaviors required for effective pursuit of alternative innovation strategies. Importantly, we articulate how the three HR systems build on alternative philosophical approaches for managing core knowledge workers in terms of attachment, selection, and coordination and control and how these choices should theoretically result in different arrays of employee AMOs to carry out the knowledge search and combination behaviors required for alternative innovation strategies. In the following sections, we develop theoretical arguments regarding the fit between alternative HR systems and innovation strategies. We start by outlining two alternative innovation strategies – exploration and exploitation – and exploring the unique knowledge search and combination requirements of each. We then present three alternative HR systems (Engineering, Bureaucratic, and Commitment HR systems) and detail how each may be aligned or misaligned to the unique knowledge requirements of exploration and exploitation. We test our model with data collected from core knowledge workers and managers from a sample of 230 software firms. THEORY AND HYPOTHESES Exploration and Exploitation. Exploration and exploitation represent distinct strategic alternatives to innovation that enable firms to adapt to changing environments (Gupta et al., 2006), but which differ in the scope and nature of required learning activities and desired outcomes (Levinthal & March, 1993). Previous research has highlighted that the unique learning and knowledge requirements of these two strategies warrant distinct organizational investments, structures, and work environments (March, 1991). Building on this prior work, we articulate the unique characteristics of knowledge search and exchange behaviors required of core knowledge workers for successful exploration and exploitation. Exploration has been broadly conceptualized as innovation with a goal of shifting or HR Strategy, Innovation, and Firm Performance 6 expanding a firm’s technological paradigm and often creating new products or entering new markets (Benner & Tushman, 2003; Levinthal & March, 1993). Exploratory learning is characterized by the search and combination of diverse and unique knowledge, risk-taking, experimentation, discovery, and frequent change (Katila & Ahuja, 2002; March, 1991). Exploration involves tasks that depart from the existing expertise of the focal organizational unit, requiring the organization to expand its base of knowledge and competence (Benner & Tushman, 2002; Taylor & Greve, 2006). Extending this logic, firms successfully pursuing exploration depend on core knowledge workers with the AMOs that enable them to search for, acquire, and integrate diverse, distal knowledge from unique sources (Beckman, 2006; Rodan & Galunic, 2004). Employees’ knowledge search and combination behaviors must also involve challenging the status quo through experimentation with novel alternatives that may vary widely from the firm’s current technological direction (Benner & Tushman, 2002). In contrast, exploitation has been defined as innovation with the goal of improving or reinforcing a firm’s current technological direction (Benner & Tushman, 2002) and is oriented toward the refinement and extension of existing products (He & Wong, 2004; Levinthal & March, 1993). In targeting innovation around existing technologies, firms pursuing exploitation require deep – rather than broad – search for knowledge and benefit from the recombination of local or similar – rather than novel – information (Baum et al., 2000; Taylor & Greve, 2006). Firms pursuing exploitation thus benefit from narrow, overlapping knowledge and localized search (either inside the organization or via other firms in the industry) for knowledge that can be readily connected to refine and extend existing products, technologies, and routines (Benner & Tushman, 2002; He & Wong, 2004). The knowledge search and combination behaviors which are likely to best support an exploitation strategy involve the application of knowledge HR Strategy, Innovation, and Firm Performance 7 which is more similar and/or related to an organization’s existing knowledge domain (Katila & Ahuja, 2002; Rodan & Galunic, 2004) and supports more incremental change consistent with a firm’s current technological trajectory (Gupta