Introduction
Human
Resource (HR) scholars
emphasize that the
essence of Strategic
Human Resource Management (SHRM)
is how organizations
link Human Resource Management (HRM)
to their business or organizational strategy (note: for practical reason, the
acronyms of HR, HRM and SHRM will be used throughout the thesis). This means
that business strategy is the main determinant factor of HR strategy, followed
by other internal or organizational and external or environmental factors (e.g.
Armstrong, 2009; Beer et al., 1984; Boxall & Purcell, 2000, 2008; Delery
& Doty, 1996; Fombrun, Tichy & Devanna, 1984; Miles & Snow, 1984;
Schuler & Jackson, 1987, 1999).
Managing Indonesian people is not easy
because of the complex cultural, geographical, historical, ethnic, religious,
economic, political and administrative
systems. Singleton and Nankervis (2007: 341) proposed an interesting
question about HRM: “how do Indonesian companies organize these activities?” in
such a diverse nation. This question refers
to the three
HR activities; first,
HR planning, recruitment
and retrenchment; second, orientation,
development, and training; and third, performance appraisal, career development
and industrial relations. They suggest the answer will vary depending on the
type of company. Some large companies
are likely to adopt
international HRM
practices, whereas smaller companies
will tend to manage their people by using an ad hoc approach.
About Indonesia
Indonesia
has
a large
population and is
a strategically located
country with a very diverse, complex, and unique social-cultural
life. Unfortunately, the country was not well recognized by the international community prior to the Asian crisis in 1997. This viewpoint is further stressed by Singleton and Nankervis (2007: 308) claim “there is no country of such vital strategic importance that is less understood than Indonesia”. Bennington and Habir (2003: 373) also mention that “until about 1997, Indonesia is one of the least known countries, but since that time, the country has become known for almost a continuous political and economic crisis”
Current
reports suggest that the population of Indonesia was 234.2 million people in June 2010 (BPS, 2010). Indonesia is
considered as the world’s fourth most populous country after
China, India, and US (CIA, 2010; Wikipedia, 2010). It also has the world’s largest population of Moslems, although officially it is not an Islamic state. Six religions are officially recognized by the government: Islam, Protestantism, Roman Catholic, Hinduism, Buddhism, and Confucianism. The distribution of the religious followers is Muslim 86.1%, Protestant 5.7%, Roman Catholic 3%, Hindu 1.8%, other or unspecified 3.4% (CIA, 2010; Wikipedia, 2010). The country has more than 300 ethnic groups, each with cultural differences which have been developed over centuries and influenced by Arabic, Chinese,
Malay, and European sources. The distribution of the main ethnic groups can be described as Javanese 40.6%,
Sundanese 15%, Madurese 3.3%, Minangkabau 2.7%, Betawi
2.4%,
Bugis 2.4%, Banten
2%,
Banjar 1.7%, other .From a religious perspective, Islam has a very strong influence on cultures such as
Aceh, Banten, Minangkabau, and Java. Bali’s culture is highly influenced by Hinduism. Batak, Manado, and Papua’s lives are colored by Christian
and Catholic influences. While
Indonesian Chinese customs are supported by
Buddhist and Confucianism teachings. Indonesians modern life style is highly influenced by
western cultures such as television
shows, movies and songs. As a result, there is a complex configuration of indigenous- religious-western values, or this can also be seen as the influence religion-rationalism- spiritualism-and traditional values in the daily life of the Indonesian people (Geertz,1960, 1967; Gunawan & Nankervis 2006; Grant, 1996;
Hill, 1996;
Kingsbury, 2005; Singleton & Nankervis, 2007, Wikipedia, 2010). It should be mentioned, however, that the educated younger generation is less influenced by
spiritualism and local beliefs. Overall, Javanese culture is to be the most influential culture in Indonesia’s daily life:
Profile of Indonesia Labour Force
“The unemployment
rate in
February 2007
was
9.75%.
Despite a slowing
global economy, Indonesia’s economic growth accelerated to a ten-year high of 6.3 percent in
2007. This growth rate was sufficient to reduce poverty from 17.8 to 16.6 percent based on the Government’s poverty line and reversed the recent trend towards jobless growth, with unemployment falling to 8.46 percent in February 2008. Unlike many of its more export-dependent neighbors, it has managed to skirt the recession, helped by strong domestic demand (which makes up about two-thirds of the
economy) and a government
fiscal stimulus package of about 1.4 percent of GDP, announced earlier this year. After India and China, Indonesia is currently the third fastest growing economy in the Group of
Twenty (G20) industrialized and developing economies” (Wikipedia, 2010: 2).
The
economic crisis that lead to the resignation of Soeharto, albeit under pressure, has significantly contributed to the changes in Indonesia’s political and government system, which
is widely
known as
the
reformation.
Habibie,
as the caretaker
president, introduced liberal political policies including withdrawing the restrictive press laws and granting permission to release new media, political prisoners, and new political parties and removing the military from political roles (Emmerson, 1999; Kim & Haque, 2002; Liddle, 1999; Shiraisi, 2001). Since this change, a more democratic environment has arisen in Indonesian society.
Since then Indonesian presidents have
been elected democratically; they are in succession order Abdurrahman Wahid, Megawati Soekarno Putri,
and Susilo Bambang Yudhoyono.
Managing Indonesian people is not easy because of the complex cultural, geographical, historical, ethnic, religious, economic, political and administrative
systems. Singleton
and Nankervis (2007: 341) proposed an interesting question about HRM: “how do Indonesian companies organize these activities?” in such a diverse nation. This question
refers
to the three HR activities; first, HR
planning, recruitment
and
retrenchment;
second, orientation, development, and training; and third, performance appraisal, career development and industrial relations. They suggest the answer will vary depending on the type of company. Some
large
companies
are likely to adopt international HRM practices, whereas smaller companies will tend to manage their people by using an ad hoc approach.
Historically HRM has
not played an important management role in Indonesian organizations. HRM is
considered a personnel function, which
merely
plays a traditional-administrative role (Habir & Larasati, 1999; Habir & Rajendran, 2007). For example Budiharjo’s study (1996) cited in Habir and Larasati (1999: 1) identified that:
“Human resource management, however, has historically not had an important role in Indonesian management. It has traditionally been regarded as personnel function, almost totally administrative in orientation. Even in this capacity, human resource management is not regarded highly. A survey undertaken in 1995 showed managers’ perceptions of the human resource audits, human resource development and planning, employee orientation, and salary system of
their companies were negative”.
Role of HRM in Indonesia
Habir and Larasati (1999) analyzed three leading Indonesian companies and their study
indicates a
changing orientation for HRM in Indonesia, which is more strategic and focused on how HRM strategies and processes align with the business imperatives. The three leading companies in their study (Sinar Mas Group, Astra group, and PT Rekayasa Indonesia) provide considerable evidence that modern HRM practices can be successfully integrated with complex Indonesian social, cultural, economic and
political dynamic by
innovative and charismatic business leadership (also see Singleton & Nankervis, 2007).Another study was conducted by the high reputation management magazine SWA in 2006. This study reported that forty-nine major companies, comprised of
eleven state enterprises and thirty-eight Indonesian private companies, showed a growing orientation toward managing their
people more strategically. These organizations believed that employees were not merely production factors, but were human capital to be developed to provide the
best contribution and value to the
organization (SWA, 2006).
Indonesian HRM scholars (e.g. Gunawan & Nankervis, 2006; Habir & Rajendran, 2007; Singleton & Nankervis, 2007) strongly agree that following the impact of globalization and the recovery from the financial crisis of the late 1990’s, there has been a growing awareness among Indonesian companies, especially big companies, that they need to pay more attention to implementing HRM
strategically to achieve organizational goals (also see Budiharjo, 1996; Ciptono, 1998; Rhodes, Walsh & Lok, 2008). This paradigm shift for Indonesian HRM is illustrated by Habir
and Rejendran:
“Nevertheless, since
the 1997 crisis, business organization have moved towards improvements in their HRM system; currently, personnel departments are known as HR department and personnel managers are re-designated as HR managers. More companies are
adopting strategic HR by highlighting the role of HR departments in their annual reports. Some companies have set up HR committees
at the governance level, in line with good corporate governance practices. These developments indicate a
growing
realization of the importance of HRM in Indonesia today” (2007: 30-31).
Because of the dynamic and environmental setting, the complexity and paradox of the society, and as the response to globalization, SHRM practices need to make continuing adjustments if
they are to be appropriate to Indonesian’s needs. Unfortunately, little attention has been given to studying HRM practices in Indonesia, even though a
number have studied HRM in other developing countries across Asia and the Asia-Pacific (see such as Budwar & Debrah, 2001; Kidd, Li & Richter, 2001, Roley, 1998). There is also a considerable lack of English language literature as is borne out in this following comment:
“Despite the
major issues facing this country and the
significant international concern about its future, reports on HRM are
limited mostly to labor economics and macro-level human resource development. The English language journals have included articles on the developing countries
in Europe, Africa, and Asia (countries
such as Hong Kong, China, Singapore, Korea, Japan, and India), but surprisingly little has been reported on Indonesia. Even Industrial relation book on Asian and East Asian countries have failed to provide chapter Indonesia.
Similarly,
the
Teagarden/Von
Glinow research consortium, which has included Indonesia as one of the target countries, has not yet reported significantly” (Bennington & Habir, 2003: 374).
Given the limited articles and research, more consideration and attention to
studies about HRM within the Indonesian context are warranted. This call is not only related to the complex setting of Indonesian life, but to the global impact. The
dynamic or even contradictive interactions that exist among internal and external aspects of HRM within
the Indonesian context are considered an interesting opportunity for study (Bennington & Habir, 2003;
Budiharjo, 1996; Ciptono, 1998; Gunawan & Nankervis, 2006; Habir & Larasati, 1999;
Habir &
Rajendran, 2007; Huo, Huang & Naphier, 2002, Jackson, 2002; Rhodes et al., 2008; Singleton & Nankervis, 2007).
The findings that HRM should fit with business strategy, and either internal and external contexts provide further strong support for the best fit or the contingency approach, which many
HR scholars
consider the superior
approach
to SHRM (e.g.
Boxall &
Purcell, 2008; Delery & Doty, 1996; Jackson & Schuler, 2007; Lengnick-Hall & Lengnick-Hall, 1988; Lengnick-Hall et al., 2009; Sisson & Storey, 2000; Tissen et al.,2010). Although scholars may focus on different aspects of fit, they agree that to achieve better performance, HRM should be able to fit
itself, or adjust to its surrounding internal and external, as does business strategy. This means organizations need to be flexible (de Pablos, 2005; Ketkar & Sett, 2010; Milliman et al., 1991; Wright & Snell, 1998).
Organizations that are able to adjust their fit to the external and internal opportunities and threats flexibly will be able to respond quickly to
environmental demands, so sustainable competitive advantage can
be
achieved. Accordingly,
HR flexibility is considered a dynamic capability that helps organizations
adapt
to changing environmental contingencies (Bhattacharya et al., 2005; Hitt et al., 2001).
The finding that
the role of business strategy as central to HR strategy is clearly in line with
the major SHRM literature (e.g. Bamberger & Meshoulam, 2000; Boxall &
Purcell, 2008; Leopold & Harris, 2009; Lundy & Cowling, 2000). Dyer
(1984a: 161) says: “organizational
strategy is the
major determinant of
organizational HR strategy”. Business strategy is also a
representation of “...what the company wants to accomplish, how it wants to
behave, and the kinds of performance and performance levels it must
demonstrate to be
effective” (Lawler, 1995:
14). The pioneers
of SHRM studies, Michigan’s model
(Fombrun et al., 1984) and Harvard’s
model (Beer et al., 1984) clearly
put business strategy as the source of reference for HR strategy. Furthermore,
the two well-known SHRM
typologies were proposed
by Miles and
Snow (1984) and Schuler
and Jackson (1987)
also emphasize this.
Miles and Snow
(1984) provide evidence that
different strategies require
different HR strategies.
Miles and Snow’s (1984) typology of strategy describes
the prospector, analyzer, defender, and reactor as business strategies that
require different formula for HRM. Similarly, based on Porter’s (1980 &
1985) typology of
business strategy, Schuler
and Jackson (1987)
provide further evidence that cost-reduction, innovation, and quality
enhancement business strategies need different employee behaviours, which leads
to a different HR strategy, and these ideas are clearly supported by Indonesian
HR managers.
Concern about
matching to HR
strategy with number
of employees has
also been identified in the
literature (e.g. Baird & Meshoulam, 1988; Boxall & Purcell, 2008;
Jackson & Schuler, 1995, 2007;
Jackson et al., 1989; Jones, 1984;
Kalleberg et al.,2006). The size of the organization and whether it has simple
or complex processes need to be taken
into consideration in
the HR strategy.
More specifically, Baird
and Meshoulam (1988) suggest that
smaller and more informal organizations
are able to have more flexible styles of HRM. In contrast, more
sophisticated and professional approaches are needed to handle the greater
complexity of a firm that is large and more mature.
More
specifically, related to organizations with more complex employees; (Boxall
& Purcell, 2008; Kalleberg et al., 2006) describe that they often have
multiple HR system; one model for management and another for professionals, or
it might be one model for core operating staff, and another model for support
employees. By employing multiple HR systems, employees can be managed more
appropriately based on their complexity so, both fairness and performance can
be achieved simultaneously. This study found that some companies
with complex tasks
for employees, especially
in the agricultural industry, adopted
multiple systems of HRM.
There are differences between
the HR system in the head office and SBUs (strategic business unit), as
well as differences between production employees and the mostly casually
employed plantation workers.
Based on the HR
managers’ experiences, some unique phenomenon emerged when implementing SHRM in
Indonesia. A small number of organizations had difficulties in gaining
sufficient financial support for SHRM, despite that organizationally a
strategic approach to HRM had been accepted. The ‘trade mark’ here is to the
treat HRM as a cost centre, not a centre of staff investment. In consequence,
some HR strategies were not be performed, especially the following up of
performance appraisals and the related training and incentives. In these
instances the HR managers indicated it was not easy to wipe the negative image
of HR out from the people’s minds. The HR needs to provide evidence that its
contributions are truly in line with the business strategy (see e.g. Andersen,
2007, Wright et al., 2001).
In particular HR
managers from the agriculture, textile, and hospital industries were concerned
because their operations or production are highly influenced by technology. The
textile and agricultural industries use machines as the main technology for
their production system and this requires employees with certain skills.
Accordingly, the HR strategy
focuses on building
employee competencies and
fostering employee commitment to
achieve the lowest unit costs (see Jackson & Schuler, 2007; Kintana et al.,
2006). On the other hand in the hospital sector, technology is used in tandem
with knowledgeable and skillful people in delivering medical treatment services
and the focus is on quality of treatment. Technology was not as crucial to the hotel
managers as they rely more on their staff to provide their services and an
atmosphere that sets them apart, as they all had similar facilities and
technology.
HR scholars
(e.g. Armstrong, 2009; Baron & Kreps, 1999; Boxall & Purcell, 2008;
Dyer & Holder, 1988; Roehling, et al., 2009) suggest that legal aspects
must be taken into consideration when formulating a HR strategy. There are many
aspects of HRM highly regulated by the Indonesian government, such as the
minimum wage, insurance, occupation health safety,
equal employment opportunity,
etc. Jackson and
Schuler (1995, 2007) underline that almost all aspects of HRM are
affected by the legal and regulatory environment; accordingly organizations
should pay attention and ensure that their HR strategies do not contradict with
the regulations. There are many studies (e.g. Gooderham et al., 1999; Gospel
& Pendleton, 2003; Pauwee &
Bosolie, 2003, 2007) that provide evidence that HRM varies across nations due
to adaptation to government regulations. In some countries it could be at the
regulations to protect the employees, while in others it may be that they
provide more benefits to employers or employees.
After emerging
from the difficulties
of 1997-1998, Indonesia
has redesigned its economy to be more resistant
to global turbulence. Economics
scholars (e.g. Basri,2002;
Eichengreen, 2004; Kim & Haque, 2002; Pincus & Ramli, 1998;
Prasetiantono,2000; Shiraisi, 2001; Smith et al., 2003) suggest this economic
reform is on the right track. More
recently, Indonesian organizations are working within growth economic
conditions: GDP per capita is around $US 4,000 with a growth of approximately
5% per year, economic growth is of more or less 6% per year; although this went
to minus 13% during the crisis of 1998.
The inflation index is between 5 to 8% per year, as compared to about
60% during the crisis. The exchange rate
in 2010 is around 9,000 Rupiahs per $US 1 in comparison to 15,000 Rupiahs ten
years ago. The labour force is estimated
at116 million people, the unemployment index about 7.40%, a decline of 3 %
compared to1998. People below the poverty line is around 13%, a big improvement
on the 40% during crisis. The minimum
wage varies in terms of amount of the money across states with the highest in
Jakarta (BPS, 2010; CIA, 2010; Gunawan & Nankervis, 2006; Manning &
Roesyad, 2006; Singleton & Nankervis 2007; Wikipedia, 2010).
HR managers mentioned
that all these conditions influence
how Indonesian organizations design their HR strategies, especially
those related to recruitment, training and development, and compensation and
other incentives strategy. Companies are highly influenced by economic
turbulence, for example when inflation is high, consumers purchasing power
becomes lower so sales will decline, revenue drops and this will influence all
organizational functions, including HRM. In this situation, for example,
usually training programs are reduced or will even be removed from the list of
HRM practices. Similarly, when the exchange rates of Rupiah drop to $ US,
companies have difficulties to import raw material and technology, and
expatriate compensation becomes higher.
Nowadays,
Indonesia cannot use low labor costs as a competitive advantage because other
countries in the region and
elsewhere have much
lower labor costs (Deyo
& Donner, 2000). Effective HRM practices can be determined as a key
factor and for being regionally and internationally competitive (Cheocharnpipat
et al. 1997, Wolfe & Arnold,1994). As early as 1999, Habir & Larasaty
identified that HRM practices in Indonesia needed a
more strategic orientation;
they need long
term orientation, continuouslearning, knowledge creation, a
team focus, empowerment and most importantly they needed to be
an integration of HRM
with the firm’s
strategy. From what
the HR managers in this study
reported, this shift is occurring.
Conclusion:
The paradigm shift in HRM in Indonesia
has come about because of the losses suffered following Asian economic crisis 1997.
This made organizations aware of how dependant they and the economy were on
employee wellbeing (Habir & Rajedran,2007; Sitalaksmi & Zhu, 2010).
In line with
previous studies, Indonesian organizations in this study indicated that their
HR department has moved from administrative to strategic roles; these are
two-way linkage and integrative
role. Golden and
Ramanujam (1985), provide
some helpful criteria to measure
the degree of strategy among HR roles, this includes the motivation for using an
integration, approach the view of HR and the HR function, the primary role of
the HR executive and the HR function, performance criteria on which HR is
measured and the for implementing HR programs or system. Those Indonesian
organizations that consider HR as important capital that helps them
achieve competitive advantages,
involve the HR
department throughout all organizational activities, both strategic
and non-strategic (operational) activities. Although the HR department may
contribute to designing the organizational strategy, they are not involved in
the decision process. An interesting
finding was that two organizations practice ‘informal strategic decision
processes’.