The impact of human resource capabilities on internal customer satisfaction and organisational effectiveness

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This article was downloaded by: [Laurentian University]On: 08 October 2014, At: 18:20Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registeredoffice: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UKTotal Quality Management & BusinessExcellencePublication details, including instructions for authors andsubscription information:http://www.tandfonline.com/loi/ctqm20The impact of human resourcecapabilities on internal customersatisfaction and organisationaleffectivenessWan-Jing April Chang a & Tung Chun Huang ba Department of Educational Psychology and Counseling , NationalHsinchu University of Education , 9F No. 35 Xian-Zheng 7th Street,Chu-Pei City, Hsin-Chu County, 302, Taiwanb Department of International Business Management , Ching YunUniversity , No. 229 Jiansing Road, Jhongli City, Taoyuan County,320, TaiwanPublished online: 10 Jun 2010.To cite this article: Wan-Jing April Chang & Tung Chun Huang (2010) The impact of human resourcecapabilities on internal customer satisfaction and organisational effectiveness, Total QualityManagement & Business Excellence, 21:6, 633-648, DOI: 10.1080/14783363.2010.483075To link to this article: http://dx.doi.org/10.1080/14783363.2010.483075PLEASE SCROLL DOWN FOR ARTICLETaylor & Francis makes every effort to ensure the accuracy of all the information (theContent) contained in the publications on our platform. 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Terms &http://www.tandfonline.com/loi/ctqm20http://www.tandfonline.com/action/showCitFormats?doi=10.1080/14783363.2010.483075http://dx.doi.org/10.1080/14783363.2010.483075Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditionsDownloaded by [Laurentian University] at 18:20 08 October 2014 http://www.tandfonline.com/page/terms-and-conditionshttp://www.tandfonline.com/page/terms-and-conditionsThe impact of human resource capabilities on internal customersatisfaction and organisational effectivenessWan-Jing April Changa and Tung Chun HuangbaDepartment of Educational Psychology and Counseling, National Hsinchu University ofEducation, 9F No. 35 Xian-Zheng 7th Street, Chu-Pei City, Hsin-Chu County, 302 Taiwan;bDepartment of International Business Management, Ching Yun University, No. 229 JiansingRoad, Jhongli City, Taoyuan County, 320 TaiwanThis study examined the impact of human resource (HR) capabilities on internalcustomer satisfaction and organisational effectiveness. It drew on data from HRmanagers and line managers; a total of 238 valid matches was obtained. Structuralequation modelling was employed to examine the proposed model. The resultsshowed that some HR capabilities appear to be linked to internal customer satisfactionand organisational effectiveness. The implications for practitioners were to modifyand emphasise certain HR practices, and to emphasise the role of internal customersfor organisational effectiveness enhancement. These findings revealed the importanceof internal customers in enhancing employee morale, organisational commitment,employee productivity, turnover rate and the organisations ability to attract talent.Keywords: human resource capabilities; internal customer satisfaction; organisationaleffectivenessNumerous studies have examined the link between HR practices and firm performance inrecent decades (Arthur, 1994; Delery & Doty, 1996; Guest, 1997; Huselid, 1995; Pfeffer,1994). The results showed that the proper use of human resource improves firm perform-ance. Most empirical studies have assumed a causal chain between HR practices andorganisational outcomes, but have left out the intermediate step between the two as ablack box. The remaining studies examined the relationships of HR practicesorganis-ational outcomes and HR practicesemployee outcomes separately. The second problemis the lack of consideration of employee opinion. Without employee contributions, it isimpossible to determine whether HR practices are beneficial to employees, or whetherthey simply add to employee workload and stress levels, resulting in a negative qualityof working life (Pass, 2002). Thirdly, previous studies have debated how to measureperformance. Earlier research focused solely on improvements to financial performance(Harel et al., 2003). However, current research has indicated the limitations of thisapproach (Eccles, 1991) and the benefits of examining the variety of outcomes of HRhave now been demonstrated, including employee motivation, commitment, reducedturnover, training levels and absenteeism rates (Jansen et al., 2001; Pass, 2002). Finally,the findings supporting the relationship between HR practices and firm performance areincomplete owing to excessive reliance on a single respondent and self-reporting(Gerhart et al., 2000; Pass, 2002), resulting in limited analysis and a failure to examinethe organisation more broadly.ISSN 1478-3363 print/ISSN 1478-3371 online# 2010 Taylor & FrancisDOI: 10.1080/14783363.2010.483075http://www.informaworld.comCorresponding author. Email: wjchang1@ms8.hinet.net, aprilchang0408@yahoo.com.twTotal Quality ManagementVol. 21, No. 6, June 2010, 633648Downloaded by [Laurentian University] at 18:20 08 October 2014 This work attempts to improve upon the prior empirical literature by focusing on thefollowing objectives. First, this study proposes an integrated model, in which a processperspective is adopted to examine the role of internal customer satisfaction, which linksHR capabilities and firm performance. Second, the opinions of HR internal customersare gathered to assess whether the degree of HR capabilities has increased levels ofcustomer satisfaction and produced more effective organisational outcomes. Third,wider performance criteria, such as HR outcomes, are used to address whether HR capa-bilities have a greater impact than financial gains. Fourth, regarding data sources, thisstudy surveys HR managers and line managers to reduce the common method bias; andalso makes line managers the target customers, instead of employees, who are not onlyHR practice users, but also members of organisational leaders with a broader perspectiveon the evaluation of overall organisational effectiveness.Theory and hypothesesHuman resource capabilitiesThe resource-based approach views competencies, capabilities, skills or strategic assets asa source of sustainable competitive advantage (Mabey et al., 1998) because of their valu-able, rare, inimitable and non-substitutable attributions (Barney, 1991). Capabilities arerooted in the ability to reconfigure and recombine resources, and their key propertiesinclude tacitness, context specificity and temporality (Bhatt, 2000). Amit and Schoemaker(1993) defined capability as a firms capability to deploy its assets, tangible or intangible,to perform a task or an activity to improve performance. Important characteristics ofcapabilities are that they are knowledge-based, firm specific and socially complex, andthey generally cannot be simply acquired in factor markets, and so are developed in thefirm (Maritan, 2001). Within this line of reasoning, Kamoche (1996) argued that afirms capacity to secure, nurture, retain and deploy human resources via HR policiesand practices forms the basis for human resource capabilities. HR capabilities are basedon developing, carrying and exchanging information within the human capital of thefirm (Saa-Perez & Garcia-Falcon, 2002).For a firm to compete effectively, best practice scholars have argued that HR practicesoften outperform comparative practices (Arthur, 1994; Delery & Doty, 1996). If this is thecase, a set of properly developed HR practices may provide an important source of sus-tained competitive advantage. Previous studies have suggested several HR best practices,for example, Huselid (1995) examined how personnel selection, performance appraisal,incentive compensation, job design, grievance procedures, information sharing, attitudeassessment and labour-management participation affect firm performance. Moreover,Delery and Doty (1996) argued that the most important HR practices include the use ofinternal career ladders, formal training systems, results-oriented appraisal, performance-based compensation, employment security, employee voice and broad job definition.Furthermore, Pfeffer (1998) identified seven HR practices, comprising the following:employment security, selective hiring, self-managed teams, provision of high pay contin-gent on company performance, extensive training, reduction of status differences, andsharing information.Additionally, many different classifications of HR practices have been formulated intomore general HR dimensions. For instance, Ulrich and his colleagues (1989) grouped HRpractices into organisation planning, staffing, rewards, development, appraisal andcommunication. Meanwhile, Schuler and Jackson (1996) summarised five dimensions:planning, staffing, appraising, rewarding and developing. Ramlall (2003) established634 W.-J.A. Chang and T.C. HuangDownloaded by [Laurentian University] at 18:20 08 October 2014 a framework consisting of strategic planning, selection, training and development,organisational development and change, performance management, a reward system, andorganisational behaviour and theory.According to Huselid et al. (1997), institutional theorists view organisations as entitiesthat seek approval for their activities in a socially constructed environment. Key internalstakeholders (line managers and executives) prefer high-quality HRM activities (Tsui,1987). HRM activities have been increasingly regulated through stakeholder expectationsincluding recruiting and selection, employee training, performance appraisal, compen-sation and employee relationships, which are adopted as dimensions of HR practicesin this study. The presence of these best practices reflects the level of HR professionalknowledge and resource allocation capabilities.Internal customer satisfactionA frequently overlooked aspect of service delivery in business is service quality amonginternal organisational units. However, in practice many organisational departments areservice providers primarily to internal customers. For example, human resources, manage-ment information systems and purchasing departments all support other employees as theyperform their jobs (Marshall et al., 1998).Two philosophies have been put forward in relation to internal customer satisfaction inprevious studies. One is from marketing; the other is from total quality management(TQM). Comparing the two philosophies, Marshall et al. (1998) argued that internal cus-tomer service differs from internal marketing, in that the former focuses on how employ-ees serve other employees, while the latter focuses on how a company serves employees.However, Mohr-Jackson (1991) considered the marketing concept and TQM to be comp-lementary business philosophies with potential for improving the success of a business.Both share core concepts, namely, customer orientation, inter-functional coordinationand profitability, and aim at generating customer satisfaction as the key to satisfyingorganisational goals.Consistent with TQM philosophy, internal customer service is viewed as a two-wayexchange process between individuals in different functional departments of a firmwhere the provider is charged with responding to the needs of his/her internal customers,leading to satisfied internal exchange partners (Marshall et al., 1998). HR departmentshave customers at all levels within the organisation. Being a business partner requiresthat these customers are acknowledged, involved and central to the operation of the HRdepartment (Ulrich, 1987). HR functions have recognised the need to provide customerswith more responsive, value-added and efficient services (Yeung et al., 1994).In an era of growing concern with studying HRM in the context of contributing to thebusiness, it seems timely and necessary to re-emphasise the value and validity of conceiv-ing HRM systems and services as involving real people in local realities (McCarthy,1994). A valid approach to evaluating HR systems and services should consider theviews of employees (Gibb, 2001), namely, internal customers. Several studies (Barney& Wright, 1998) evaluated line executives perceptions of the effectiveness of HR prac-tices. They enabled us to analyse the responsiveness of HR departments to internal custo-mer demands. Line executives perceptions of the effectiveness and importance of HRpractices will help indicate the potential of HR departments to become real business part-ners. Additionally, Mitsyhashi et al. (2000) found significant differences exist between HRand line executives in their perceptions of the effectiveness of these areas, and the formerconsistently rated the effectiveness of functions more highly than the latter (Wright et al.,Total Quality Management 635Downloaded by [Laurentian University] at 18:20 08 October 2014 2001), though the study indicated a lack of significant differences between HR and lineexecutives perceptions of the importance of each functional area in HRM (Mitsyhashiet al., 2000).Therefore, in this study, we chose line managers as target customers to evaluate theirsatisfaction regarding human resource practices. This is because they are not only thedirect users of HR practice, but also the members of organisational leaders who adopt abroader view when assessing overall organisational effectiveness.Organisational effectivenessOrganisational effectiveness refers to how successfully organisations achieve their mis-sions. Organisational effectiveness measures are concerned with understanding theunique capabilities that organisations develop to ensure that success. This includesmeasuring the value of organisational human resources (Jamrog & Overholt, 2004).Previously, scholars tended to use the term organisational performance to meanfinancial and economic-related measures such as profitability, return on investment, earn-ings per share and so on (Harel et al., 2003). However, according to Eccles (1991), aca-demics and practitioners have begun to demonstrate that accrual-based performancemeasures are obsolete and often harmful. Consequently, business practices could beassessed in terms of their contribution to subjective psychological wellbeing (e.g. commit-ment, involvement or satisfaction), rather than in terms of objective criteria (Jansen et al.,2001), since employers employ not just one part of a person but rather the whole person,including personal, social and professional qualities (Harnesk, 2004). Therefore, in thisstudy, the focus of organisational effectiveness is a newer concept than organisational per-formance, and implicitly considers a range of variables, which mainly focus on humanresource outcomes.Several studies have assessed different sets of variables. For instance, Robbins (1984)identified productivity, absenteeism, turnover, organisational citizenship behaviour andjob satisfaction as indicators of organisational effectiveness. Huselid (1995) and Sunet al. (2007) suggested using employee productivity and turnover as measures of firmperformance. Ryan et al. (1996) used employee turnover as a measure of organisationaleffectiveness. In Guest and Conways (1997) model, commitment is an attitudinal conse-quence and intention to stay/quit is a behavioural consequence of the psychological con-tract. According to Bratton and Gold (1999), high employee commitment to organisationalgoals is an important facet of human resource outcomes. Lawson and Hepp (2001)measured employee results based on satisfaction, commitment and productivity. Addition-ally, Huang (2001) asked respondents to compare the performance of their firms with thatof competitors, using five human resource outcome indicators: staff morale, organisationalclimate, staff turnover, organisational commitment and job satisfaction.To comply with this newer definition of organisation effectiveness, this study used amultiple variable measure, which incorporates the HR aspects of organisational effective-ness: employee morale, attraction of talent, employee productivity, organisational com-mitment and employee turnover rate.Human resource capabilities, internal customer satisfaction and organisationaleffectivenessYeung and Berman (1997) provided a model showing how HR practices contribute toemployee satisfaction and organisational capability, which in turn influence customer636 W.-J.A. Chang and T.C. HuangDownloaded by [Laurentian University] at 18:20 08 October 2014 and shareholder satisfaction. One could assess HR capabilities through surveying a firmscustomers. For example, Tsui (1990) examined how managers and supervisors as well asline executives rated the importance and effectiveness of the HR function. Ulrich (1997)suggested conducting an HR audit as part of a balanced scorecard approach to evaluatingthe effectiveness of the HR function. One aspect of this audit is the customer value survey,in which employees, as users of the HR programmes and practices, indicate their evalu-ations of the value of these practices. Several studies have also addressed internal customerservice within the context of human resource departments. For example, Mohr-Jackson(1991) examined how HR employees might develop and sustain a customer orientationsuch that marketing concepts are implemented on an intra-organisational basis. Similarly,Bowen (1996) described how the HR function can positively influence the satisfaction ofboth its internal and external customers. When HR departments can offer more best prac-tices and demonstrate their capabilities to reconfigure and recombine human resources, thesatisfaction of internal customers will increase accordingly. Therefore, the followinghypothesis was developed:Hypothesis 1: Human resource capabilities have a positive impact on internal customersatisfaction.According to TQM philosophy, internal customer satisfaction is one of the criticalissues. Through employee satisfaction, human resource practices have a positive impacton organisational outcomes. There is empirical evidence to support this claim. Forinstance, the major predictors of the improvement in the overall effectiveness of HRwere changes in employee satisfaction level (Teo & Crawford, 2005). Molina andOrtega (2003) indicated that more training can positively impact on firm performancethrough factors such as employee satisfaction and customer loyalty. Additionally,Hoque (2003) suggested that by adopting a balanced scorecard a firm that has adoptedTQM can in turn increase employee satisfaction and subsequently firm performance.Wright et al. (1994) also argued that human resource practices embedded in the HRsystem of a firm can affect employee performance by influencing employee skills andmotivation.Scholars have also examined the relationship between employee satisfaction andvarious human resource outcomes. For instance, Matzler et al. (2004) found that employeesatisfaction drives productivity. Vora (2004) focused on key factors to create anenvironment for employee satisfaction, leading to improved employee morale toachieve enterprise-wide success in a global economy. Min (2004) claimed that firmshave to formulate various employee retention strategies, including pay rises, bonuses,gain sharing and paid time off, to reduce turnover.This study expects to find a positive relationship between internal customer satisfac-tion and HR aspects of organisational effectiveness. Therefore, the following hypothesisis proposed:Hypothesis 2: Internal customer satisfaction has a positive impact on organisationaleffectiveness.Human resource management, in the form of high performance work practices, candirectly influence organisational effectiveness. This proposition has become a staplewithin the HRM literature at the theoretical level. Pfeffer (1994) and Guest (1997)suggested that universalistic HR practices should be studied as antecedents to organis-ational effectiveness. Most scholars have emphasised HR as a determinant of firm per-formance (Karami et al., 2004), and a relationship between core competencies and firmperformance is expected, particularly with a special focus on the relationship betweenTotal Quality Management 637Downloaded by [Laurentian University] at 18:20 08 October 2014 HR capability and organisational effectiveness. Several studies have consistently found astatistically significant relationship between HR and organisational effectiveness, whichincludes employee productivity, turnover, morale, organisational climate, organisationalcommitment and job satisfaction (Arthur, 1994; Chang & Chen, 2002; Huang, 2001;Huselid, 1995; Pfeffer, 1994). Consequently, the following hypothesis is proposed:Hypothesis 3: Human resource capabilities have a positive impact on organisationaleffectiveness.MethodsSampleThe sample was drawn from the database of China Credit Information Service Company.Firms with fewer than 100 employees were excluded from the analysis since Taiwanesecompanies are mainly smallmedium enterprises, and usually do not have a formal organ-isational unit dealing with human resources. Similar studies performed in Asia (Lau &Ngo, 2001; Wan et al., 2002) used 50 employees as a cut-off point in sample selection.A total of 1236 questionnaires were sent to HR managers and line managers of eachfirm. Of these questionnaires, 270 HR manager questionnaires and 242 line manager ques-tionnaires were returned. Only firms for which questionnaires were obtained from bothrespondents were considered in this study. A total of 238 valid matches was obtained,for a response rate of 19.3%, exceeding that of other similar studies including 13.8% byOrlando and Johnson (2004). A comparison of respondent and non-respondent firmsrevealed no significant differences in size and industry. The number of employeesranged from 104 to 15,000 with a median of 360 and a mean of 951. There were 79.9%of firms involved in the manufacturing sectors, 15.2% in the service sectors, and 5.1%in other sectors.MeasuresHuman resource capabilitiesTwenty-five items were developed based on the literature and are used to represent the fivedimensions of human resource capabilities: recruitment and selection, employee training,performance appraisal, compensation and employee relationship. Each dimension scalewas measured using five items. Based on the scale used by Huselid et al. (1997) toassess HR capabilities through the extent of their application, the HR managers wereasked to indicate the frequency of HR practice implementation on a five-point Likertscale ranging from always (5) to never (1). Reliability tests were conducted for eachscale, and the alpha coefficients are 0.80, 0.82, 0.86, 0.83 and 0.85 for recruitment andselection, employee training, performance appraisal, compensation and employeerelationship, respectively. Internal consistency measures all exceeded 0.80, indicatingthat the human resource capabilities scale was reliable.Internal customer satisfactionTen items were used to measure internal customer satisfaction. Line managers were askedto indicate the degree of their satisfaction with recruitment, selection, training for new-comers, training for current employees, career planning, promotion system, performancemanagement, compensation, benefits and employee relationship. The responses were638 W.-J.A. Chang and T.C. HuangDownloaded by [Laurentian University] at 18:20 08 October 2014 recorded using a five-point Likert scale ranging from strongly agree (5) to stronglydisagree (1). The internal consistency reliability was 0.91.Organisational effectivenessOrganisational effectiveness was measured using a scale composed of five items. Linemanagers were asked to compare employee morale, attraction to talent, employee pro-ductivity, organisational commitment and employee turnover rate with competing firms.A five-point Likert scale was also used to assess the responses, and ranged from muchbetter than competitors (5) to much worse than competitors (1). The internal consistencyreliability was 0.85.Since the responses regarding international customer satisfaction and organisationaleffectiveness both used self-report measures and came from line managers, factor analysiswas performed to confirm that common method variance is not serious in the present study(Podsakoff & Organ, 1986). The results indicated that the items used to measure inter-national customer satisfaction and organisational effectiveness were completely separate,and no single factor was dominant (Table 1).Table 1. Factor analysis on customer satisfaction and organisational effectiveness.Factor loadingItemsCustomersatisfactionOrganisationaleffectiveness1. I am satisfied with performance managementpractice in my company.0.7842. I am satisfied with selection practice in my company. 0.7483. I am satisfied with benefits practice in my company. 0.7364. I am satisfied with promotion system practice in mycompany.0.7325. I am satisfied with compensation practice in mycompany.0.7276. I am satisfied with training for newcomer practice inmy company.0.7257. I am satisfied with recruitment practice in mycompany.0.7238. I am satisfied with training for employees practice inmy company.0.6849. I am satisfied with career planning practice in mycompany.0.66310. I am satisfied with employee relationship practice inmy company.0.64811. Our employee productivity compares favourablywith that of our competitors.0.78512. Our employee morale compares favourably with thatof our competitors.0.76915. Our organisations attractiveness to talent comparesfavourably with that of our competitors.0.74713. Our employee turnover rate compares favourablywith that of our competitors.0.69614. Our organisational commitment comparesfavourably with that of our competitors.0.666Eigenvalue 5.702 3.493Explanation of variance 38.014 23.287Notes: Extraction method: principal component analysis. Rotation method: varimax with Kaiser normalisation.Total Quality Management 639Downloaded by [Laurentian University] at 18:20 08 October 2014 Analytical techniqueThis study used the structural equation modelling (SEM) technique to establish the model.Before conducting the model analysis, the data were screened and it was determined thatthe statistical assumptions of normality and linear relationship were both met. First theassumption of normality for each continuous variable was examined. According toKline (1998), if the absolute value of skewness is greater than three or the absolutevalue of kurtosis is greater than 10, the distribution is considered as abnormal. The skew-ness and kurtosis measures of the variables ranged from 0.105 to 0.505, and from 0.033 to0.428, respectively. The sample distribution thus did not violate the normality assumption.Second, the assumption of a linear relationship was examined, which is critical whenadopting SEM analysis. The mostly commonly used method is to calculate the Pearsonsr to determine whether a linear relationship exists. As shown by the data in Table 2, thecorrelation coefficients of all variables are significant; that is, the linear relationshipassumption is also validated. Finally, this study selected maximum likelihood (ML) asthe estimating method. ML is widely used and is based on the normal distributiontheory, which is the appropriate approach to employ.ResultsDescriptive statistics and correlation coefficients among the variables are shown inTable 2. The five HR capability dimensions are all significantly and positively relatedto internal customer satisfaction and organisational effectiveness (p , 0.01). Also,internal customer satisfaction is significantly and positively related to organisationaleffectiveness at p , 0.01 level. This study employs structural equation modelling withLISREL for hypothesis testing. The maximum likelihood method of estimation isapplied to analyse the covariance matrix. LISREL enables the simultaneous evaluationof all the predicted relations in the integrated model.Table 3 lists the structural equation results and estimated coefficients for the statisticsof the hypothetical model. The chi-square statistic of the model is non-significant (x2 4.88, df 5, p 0.43), which means that no significant difference exists between the pro-posed data and the model. Additionally, all the fit indices clearly exceed the recommendedcut-off values. The GFI and NFI values of 0.99, the AGFI value of 0.97, and the RMSEAvalue of 0.019 indicate that the hypothesised model closely fits the data. Furthermore, 50%and 43% of the variance in internal customer satisfaction and organisational effectiveness,respectively, were explained by the proposed model. Figure 1 illustrates the significantpaths of the structural model.Table 2. Descriptive statistics and Pearson correlations.Mean SD 1 2 3 4 5 61. Staffing 3.7709 0.68872. Training 3.4833 0.7101 0.6703. Performance 3.7377 0.7311 0.602 0.6884. Compensation 3.6466 0.7262 0.584 0.640 0.7315. Relationship 3.3948 0.8636 0.544 0.642 0.666 0.7106. Satisfaction 3.3797 0.5992 0.508 0.599 0.625 0.618 0.6287. Effectiveness 3.5422 0.6660 0.328 0.418 0.451 0.548 0.425 0.616Notes: p , 0.01, N 238.640 W.-J.A. Chang and T.C. HuangDownloaded by [Laurentian University] at 18:20 08 October 2014 Hypothesis 1Regarding tests of the effect of human resource capabilities on international customer sat-isfaction, four of five HR capability dimensions were demonstrated to have positive andsignificant impacts on internal customer satisfaction with recruitment and selectionbeing the two exceptions. Employee training is positively and significantly related tointernal customer satisfaction (g 0.20, t 2.85, p , 0.01; supported). Moreover, per-formance appraisal is positively and significantly related to internal customer satisfaction(g 0.20, t 2.57, p , 0.01; supported). Compensation is positively and significantlyrelated to internal customer satisfaction (g 0.18, t 2.33, p , 0.05; supported).Finally, employee relationship is positively and significantly related to internal customerTable 3. Structural equations results and estimated coefficients (standardised).Independent variablesDependent variablesInternal customersatisfactionOrganisationeffectivenessEffect t Effect tExogenous variableRecruitment and selectionDirect Indirect Total Employee trainingDirect 0.20 2.85 Indirect 0.09 2.64Total 0.20 2.85 0.09 2.64Performance appraisalDirect 0.20 2.57 Indirect 0.09 2.42Total 0.20 2.57 0.09 2.42CompensationDirect 0.18 2.33 0.27 4.16Indirect 0.08 2.22Total 0.18 2.33 0.35 5.16Employee relationshipDirect 0.24 3.38 Indirect 0.11 3.05Total 0.24 3.38 0.11 3.05Endogenous variableInternal customer satisfactionDirect 0.45 7.07Indirect Total 0.45 7.07Squared multiple correlation for structural equation 0.50 0.43Goodness of fit statisticsChi-square 4.88 (p 0.43)RMSEA 0.019GFI 0.99AGFI 0.97NFI 0.99Notes: p , 0.05, p , 0.01, p , 0.001.Total Quality Management 641Downloaded by [Laurentian University] at 18:20 08 October 2014 satisfaction (g 0.24, t 3.38, p , 0.001; supported). However, recruitment and selec-tion does not influence internal customer satisfaction. Therefore, Hypothesis 1 is partiallysupported.Evidence is found for four out of five HR capability dimensions impacting on internalcustomer satisfaction. First, for employee training, line managers are satisfied when thehuman resource department demonstrates its capabilities regarding the process of trainingneeds assessment, structural training programmes and training evaluation, job rotationimplementation and training budget allocation. The training programme is customeroriented, which is based on consistent objectives from design, through to implementationand evaluation. Job rotation provides opportunities for employees to acquire new experi-ences with different knowledge and skills, thus benefiting their future development. More-over, the training budget indicates the basic resources which employees need and is asymbol of organisational support.Second, regarding performance appraisal, line managers are satisfied when humanresource departments demonstrate their capabilities in effective performance systemimplementation: align employee objectives with organisational goals from the beginning,employees set criteria with supervisors, supervisors give frequent feedback to employees,Figure 1. The result of structural equation modelling.Notes: x2 4.88, df 5, p 0.43, RMSEA 0.019. Standardised coefficients for the model arepresented. p , 0.05, p , 0.01, p , 0.001.642 W.-J.A. Chang and T.C. HuangDownloaded by [Laurentian University] at 18:20 08 October 2014 supervisors conduct performance interviews with employees, and HR departmentsmonitor and audit performance systems. It is only when individual objectives fit organis-ational goals that employee efforts contribute to firm performance. Additionally, the closeinteraction and consensus generated between supervisors and employees increase the like-lihood of goal achievement. Finally, monitoring and auditing ensure that the performancesystem maintains its appropriateness and timeliness.Third, regarding compensation and benefits, line managers are satisfied when humanresource departments demonstrate capabilities in job evaluation, market surveys, a pay-for-performance system, competitive compensation and benefits in the labour market.Job evaluation is designed to pursue internal equity, while a market survey pursues exter-nal equity. Equity theory suggests that people evaluate the fairness of their situation bycomparing it with that of others, and such comparisons influence their work attitudesand behaviours. Additionally, the pay-for-performance system rewards employee contri-butions, while competitive compensation and benefits attract and retain organisationaltalent. These are critical methods used by line managers to motivate employees.Fourth, for employee relationships, line managers are satisfied when human resourcedepartments demonstrate their capabilities in two-way communication, including top-down communication to release information regarding business operations and paymentsystems, and bottom-up communication to establish mechanisms for employees toexpress opinions via an employeemeeting and grievance system.Additionally, they encour-aged employees to involve themselves in work-related decision making. Since employeesare well informed, there is relatively little chance of them misunderstanding policies andsystems. Also, through involving themselves in the process of decision making, employeesnot only express their needs, but also gain respect from the organisation.However, there was no support for recruitment and selection impacting on internal cus-tomer satisfaction. This might result from the different emphases of HR professionals andline managers. HR professionals focus on whether the recruitment plan fits business strat-egy, recruitment effectiveness, and are concerned about the multi-methods, reliable andvalid selection instruments, as well as the fit between applicants and the organisation.From the perspective of users, line managers may care more about the length of timerequired to recruit the right person, as well as the cooperative ability and stability of thenewcomers. Therefore, the capabilities demonstrated by the HR department in recruitmentand selection do not affect internal customer satisfaction.Hypothesis 2As predicted, internal customer satisfaction is positive and significantly related to organ-isation effectiveness (b 0.45, t 7.07, p , 0.001). Therefore, Hypothesis 2 is fullysupported.When internal customers are satisfied with human resource practices, recruitment,selection, employee orientation, employee training, career planning, promotion, perform-ance appraisal, compensation, benefits and employee relationship, attitudes such as moraleand commitment of employees are enhanced, in turn increasing employee behaviours suchas productivity and decreasing turnover rate. This positive loop also increases the ability ofan organisation to attract talent.Hypothesis 3To test the effect of human resource capabilities on organisational effectiveness, onlyone of five HR capabilities was found to have a positive and significant impact onTotal Quality Management 643Downloaded by [Laurentian University] at 18:20 08 October 2014 organisational effectiveness. Compensation is positively and significantly related to organ-isational effectiveness (g 0.27, t 4.16, p , 0.01; supported). However, recruitmentand selection, employee training, performance appraisal and employee relationship haveno influence on organisational effectiveness. Therefore, Hypothesis 3 is partiallysupported.Compensation was one of the issues that employees are concerned with. According toequity theory, employees perceive that they are fairly treated based on comparing them-selves with other people inside and outside the organisation, or based on expectationtheory, when employees obtained what they gave based on their efforts. It is morelikely to enhance employee morale and organisational commitment, increase productivityand decrease turnover rate. Additionally, if organisations provide higher compensationand benefits than their competitors, they are more likely to attract and retain talent.Full modelPutting all the hypotheses together, the result of standardised total effects shows thatemployee relationship is the most important determinant (0.24) of internal customer sat-isfaction, followed by employee training (0.20), performance appraisal (0.20) and com-pensation (0.18). They share almost the same influence in terms of enhancing internalcustomer satisfaction. On the other hand, internal customer satisfaction exerts the greatestinfluence on organisational effectiveness (0.45), while the subsequent predictors of organ-isational effectiveness are compensation (0.35), employee relationship (0.11), employeetraining (0.09) and performance appraisal (0.09). The last three also share almost identicallevels of influence. Compensation exerts the greatest effect on organisational effectivenessand the least impact on internal customer satisfaction among the five HR capabilitydimensions.For employees, compensation is the least important influence on satisfaction, whichmay reflect the fact that employees have already accepted the compensation offeredbefore entering the organisation; however, they are served by the other human resourcepractices until they became organisation members. Thus compensation is not the majordeterminant of satisfaction. On the other hand, compensation affects organisational effec-tiveness mostly among five HR dimensions, which shows that compensation is the finaloutcome of employee efforts, and thus directly influences organisational effectiveness,i.e. morale, organisational commitment, productivity, turnover and the organisationsability to attract employees.DiscussionImplicationsOverall, the results of this study are consistent with the proposed hypotheses, and themodel that we have adopted is a good fit. This study has some significant implications.These implications are discussed below, first by modifying and emphasising certain HRpractices, and second by focusing on the role of internal customers for organisationaleffectiveness enhancement.Regarding the first point, some HR practices might need to be reconsidered based oncustomer needs. For example, recruitment and selection, the fit between recruitment planand business strategy, recruitment effectiveness, multiple recruitment methods, reliableand valid selection instruments, and the fit between applicants and the organisation withwhich the HR professional is concerned may have lower priority than other factors such644 W.-J.A. Chang and T.C. HuangDownloaded by [Laurentian University] at 18:20 08 October 2014 as the length of time required to recruit the right person, the cooperation ability of new-comers and their stability which are key concerns for internal customers.Other HR practices might play a critical role in boosting organisational effective-ness. For example, compensation and benefits are the issues of most concern toemployees. HR professionals should devote considerable efforts to demonstratingtheir capabilities in job evaluation, market surveys, a pay-for-performance system, com-petitive compensation and benefits in the labour market. Such efforts will not onlysatisfy their customers, but also increase the possibilities for enhancing organisationaleffectiveness.Regarding the second point, to enhance the satisfaction of internal customers, HR pro-fessionals should understand and remain close to their customers, and improve HR servicequality. On the one hand, HR professionals can use various methods to learn about thebusiness and its customers. For example, they can send HR professionals to technical con-ferences, invite talent such as engineers, marketers, financiers, research and developmentspecialists to meet with HR groups, ensure that HR professionals join business teams, anddistribute to HR professionals copies of strategic plans, technical reports and customerreviews of products and services. Additionally, at staff meetings, the business can bediscussed as frequently as compensation, appraisal, or training and development. Suchdiscussion can require that customers are acknowledged, involved, and central to theoperation of the HR department.On the other hand, HR professionals not only are responsible for managing people-related practices, but also deal with employee problems. Besides shaping HR practices,HR professionals may involve line managers in HR responsibilities. Many of these prac-tices and problems can be more effectively handled by line managers because of theircloser interaction with and greater understanding of employee needs and problems. HRprofessionals should see their primary role as helping managers improve managementquality and helping them cope with employee problems. By emphasising the specialrole of managers in people management, HR professionals can better enhance servicequality.Limitations and future directionsAlthough the proposed model demonstrates satisfactory results, it focuses on only a fewcritical variables that affect organisational effectiveness. However, the structural equationmodelling technique can be used to examine the effects of many other variables. There-fore, future research can consider alternative elaborate models. Regarding the mediatingrelationship, the present study only focused on the role of internal customer satisfactionin the relationship of HR performance, and the antecedents of HR capabilities and conse-quences of organisational effectiveness thus can be further explored. Second, the balancedscorecard approach provides a framework for evaluating firm performance; one coulddevelop internal process, customer and financial dimensions following organisationaleffectiveness to examine the consequent effects of employee outcomes. Third, organis-ational effectiveness in this study includes attitude and behaviour variables, and atti-tude-behaviour-performance logic can be adopted to develop more insights in the blackbox. Additionally, for the moderating relationship, different groups of internal customerscould be surveyed, such as employees, line managers and CEOs. Owning to the differentnature of their tasks, it is reasonable to assume that the relationship between HR capabili-ties and organisational effectiveness via internal customer satisfaction might differaccording to the target customers.Total Quality Management 645Downloaded by [Laurentian University] at 18:20 08 October 2014 This work focused on Taiwanese employees of 2002, and the results are only relevantfor research on a similar subject area. Longitudinal data may prove a valuable casualrelationship in a comparative study.This study measures human resource capabilities based on the frequencies of eachHR practice as reported by HR managers. Though this study avoided mixing writtenHR policies with implementation, as scholars recommend, future researchers may wishto consider quality rather than quantity of HR capabilities, since the quantity of HR prac-tices alone does not guarantee enhancement of HR capabilities.This work integrated HR capabilities, internal customer satisfaction and organisationaleffectiveness to capture the picture inside the black box. A more sophisticated model ofHR performance, one that simultaneously integrates insights instead of addressing themseparately, would offer fertile ground for additional contributions. Future studies mightalso explore the relationship between the proposed model and more expansive modelsembracing a broader range of issues.ReferencesAmit, R., & Schoemaker, P.J.H. (1993). Strategic assets and organizational rent. StrategicManagement Journal, 14, 3346.Arthur, J. (1994). 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