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“Best practice” approaches to strategic HRM assumes that objectively there are better ways of managing people of a specific organizational type. Best practice can be hard or soft HRM (Storey, 2001). Harder, more conservative versions of this approach assume that this will include a reliance on external labour markets for skills, insecure contracting in order to ensure that surplus or unproductive labour can be readily disposed of and more productive workers incentivized to work harder - with pay being linked closely to individual performance, the latter closely measured. It was argued that given that such approaches were inevitably superior, firms would naturally drift in this direction; those that did not do so would find themselves in an uncompetitive situation and possibly facing extinction (Wood, 2010:3).

In addition to the above, Youndt, Snell, Dean and Lepak (1996:837) stated that, to date, two primary perspectives - a universal approach and a contingency approach - have been used to describe the link between human resource management (HRM) and firm performance. The universal, or "best practices" perspective implies a direct relationship between particular approaches to human resources and performance, while the contingency perspective posits that an organization's strategic posture either augments or diminishes the impact of HR practices on performance. The above scholars provided two important approaches to describe a possible relationship between HRM and firm performance. In line with these ideas, this study explores whether there is a possible set of optimal practices and what these might be.

Interestingly, high commitment HR practices impact the willingness of employees to make an effort and satisfy customers, which in turn, affects the overall performance of the organization (Batt, 2002). He further states that high commitment HR systems are focused on three broad dimensions, including: recruitment and selection, job design, and incentives (Batt, 2002). The three HR practice components of the high commitment HR system impact both the motivation and skills of employees (Wright, Dunford & Snell, 2001). In addition to the above, researchers have argued that human resource management practices can contribute to competitive advantage

insofar as they elicit and reinforce a set of role behaviours that result in lowering costs, enhancing product differentiation, or both (Schuler & Jackson, 1987).

According to Storey (1995:4), sustained competitive advantage derives from a firm’s internal resources. For these to offer on-going advantage these resources must have four qualities: they must add value, be unique or rare, be difficult for competitors to imitate and be non-substitutable (for example by technology). Various authors (Collins & Smith, 2006; Wright, Dunford & Snell, 2001) drawing on the resource-based view of the firm and scholars within this stream of research, have argued that HR practices create a sustainable competitive advantage for firms by creating employee-based competencies that are difficult to imitate, because they are rare, valuable, and non-substitutable. Thus, Wright et al., (1994), distinguished between the firm’s human resources (for example the human capital pool) and HR practices (those HR tools used to manage the human capital pool). In applying the concepts of value, rareness, inimitability, and substitutability, they argued that the HR practices could not form the basis for sustainable competitive advantage since any individual HR practice could be easily copied by competitors. Rather, they proposed that the human capital pool (a highly skilled and highly motivated workforce) had greater potential to constitute a source of sustainable competitive advantage. In contrast, Lado and Wilson (1994) proposed that a firm’s HR practices could provide a source of sustainable competitive advantage. Coming from the perspective of exploring the role of HR in influencing the competencies of the firm, they suggested that HR systems (as opposed to individual practices) can be unique, causally ambiguous and synergistic in how they enhance firm competencies, and thus could be inimitable. Thus, whereas Wright et al. (1994) argued for imitability of individual practices while Lado and Wilson noted that the system of HR practices, with all the complementarities and interdependencies amongst this set of practices, would be impossible to imitate.

It has become a widely held premise that people provide organizations with an important source of sustainable competitive advantage (Pfeffer, 1994; Wright, McMahan & McWilliams, 1994) and that the effective management of human capital, not physical capital, may be the ultimate determinant of organizational performance (Reich, 1991). Accordingly, it is instrumental for manufacturing firms to harness the productive potential of their employees in order to achieve superior performance. Thus, Barney (1995:60) adds that sustained competitive advantage cannot be created simply by evaluating environmental opportunities and threats, and then conducting business only in high-opportunity, low-threat environments. Rather, creating sustained competitive advantage depends on the unique resources and capabilities that a firm brings to its environment. To discover these resources and capabilities, managers must look inside their firm for valuable, rare and costly-to-imitate resources and then exploit these resources through their organizations.

Koch and McGrath (1996:335) followed a similar logic in their study of the relationship between HR planning, recruitment, staffing practices and labour productivity. They argued that “…a highly productive workforce is likely to have attributes that make it a particularly valuable strategic asset”. They found that firms maintain effective routines for acquiring human assets, developing a stock of talent that cannot be easily imitated. They also discovered that these HR

practices were related to labour productivity in a sample of business units and that this relationship was stronger in capital intensive organizations. Delery and Doty (1996) found significant relationships between HR practices and accounting profits among a sample of banks. Youndt, Snell, Dean, and Lepak (1996) found that among their sample of manufacturing firms, certain combinations of HR practices were related to operational performance indicators. This thesis tries to complete the above scholars’ works as it investigates whether or not there is a relationship between best labour practice and firm performance.

Going beyond these direct HR-performance relationships, however, other evidence suggests that the impact of HR practices on firm performance may be further enhanced when practices are matched with the competitive requirements inherent in a firm's strategic posture (Cappelli & Singh, 1992; Wright, Smart, & McMahan, 1995). In fact, Arthur (1994) and Huselid (1995) did find a relationship between HR practices and turnover. Wright, McCormick, Sherman and McMahan (1999) found that appraisal and training practices were related to executives’ assessment of the skills and that compensation practices were related to their assessments of workforce motivation. However, as yet, no study has demonstrated anything close to a full causal model through which HR practices are purported to impact firm performance.

Over the years, researchers have amassed a fair amount of empirical evidence that certain HR practices can directly affect firm performance. For example, studies show that comprehensive selection and training activities are frequently correlated with both productivity and firm performance (Kleiner et al., 1987; Russell et al., 1985; Terpstra & Rozell, 1993). According to Youndt et al., (1996), firms should create a high degree of internal consistency, or fit, among their HR activities. As Baird and Meshoulam (1988:122) emphasize, a firm's HR activities "must fit with and support each other if peak organizational performance is to be achieved”. Supporting the HR systems and internal fit viewpoints, Arthur (1992, 1994) found that HR practices focused on enhancing employee commitment (for example: decentralized decision-making, comprehensive training, salaried compensation and employee participation) was related to higher performance. Conversely, he also found that HR practices that focused on control, efficiency and the reduction of employee skills and discretion were associated with increased turnover and poorer manufacturing performance.

Similarly, in a study of high performance work practices, Huselid (1995) found that investments in HR activities such as incentive compensation, selective staffing techniques and employee participation resulted in a lower turnover, greater productivity and increased organizational performance through their impact on employee skill development and motivation. Youndt, Snell, Dean and Lepak (1996) further indicate that most of the studies focus on enhancing the skill base of employees through HR activities such as selective staffing, comprehensive training, and broad developmental efforts like job rotation and cross-utilization. Furthermore, the studies tend to promote empowerment, participative problem-solving, and teamwork with job redesign, group- based incentives and a transition from hourly to salaried compensation for production workers. In other words, HR practice relates to firm performance (which coincides with what this thesis tries to investigate).

Such an approach is characterized by the use of structured workplace training, a specialized people management function and coherent HR planning, with employment relations centring on a recognition agreement with a representative trade union (Wood & Els, 2000). The use of such strategies has, in the South African context, provided an alternative and more durable basis of competitiveness to the super-numerical-flexibility / autocratic management paradigm (Wood & Sela, 2000).

Certainly, the existing research suggests a positive relationship between HR and performance. However, contrary to Huselid and Becker’s (2000) claim, this body of work tends to lack sufficient methodological rigour to demonstrate that the relationship is actually causal in the sense that HR practices, when instituted, lead to higher performance. Little, if any, research has utilized rigorous designs to test the hypothesis that employing progressive HRM systems actually results in higher organizational performance in a causal sense.

In an effort to look beyond the human capital pool alone, Youndt and Snell (2001) studied the differential effects of HR practices on human capital, social capital, and organizational capital. They found that for intensive/extensive staffing, competitive pay, intensive/extensive training and promotion from within, policies were most important for distinguishing high levels of human capital in organizations. In contrast, broad-banding, compressed wages, team structures, socialization and mentoring and group incentives distinguished those with high social capital (for example relationships that engender knowledge exchange) but had very little effect on human capital itself.