Firm strategy, employee retention and organizational performance: a moderated mediation study of New Zealand SMEs

• Date: 22 August 2024
• Pages: 1772-1796
• DOI: https://doi.org/10.1108/IJM-10-2023-0633
• Published date: 22 August 2024
• Subject Matter: Economics,Labour economics
• Author: Jarrod Haar,Stephen James Kelly

Firm strategy, employee retention

and organizational performance:

a moderated mediation study

of New Zealand SMEs

Jarrod Haar

School of Management, Massey University, Auckland, New Zealand, and

Stephen James Kelly

School of Management, Massey University, Palmerston North, New Zealand

Abstract

Purpose –An effective firm strategy is key to sustained financial performance, while interactions between

strategy, employee retention and top talent retention have been seldom explored. We test hypotheses using

New Zealand SMEs which are defined as having up to 250 employees. We initially explore firm strategy using

Porters competitive advantage model predicting employee retention (including top talent), with study 1

(n5208) using firm size as a moderator, finding a direct significant relationship from firm strategy toward

employee retention. Next, we explore firm strategy predicting firm performance with employee retention

mediating and include firm size as a moderator, testing a moderated mediation model in study 2 (n5474) and

study 3 (n5300, with time-lagged performance).

Design/methodology/approach –There are no open databases holding NZ firms’ performance data and

thus data was sourced from a Qualtrics survey panel. Such panels have become more common (e.g. Haar et al.,

2021a, b) and a recent meta-analysis by Walter et al. (2019) showed that this type of panel data was no different

from data sourced through conventional means (i.e. mail survey). We focused on NZ private sector SMEs using

senior managers across a range of industries and geographic locations. Because the influence of firm strategy

on employee retention remains unknown in the literature, we conducted study 1 (n5208) to test the initial part

of our overall model. Study 2 (n5474) and study 3 (n5300) tested the full model (with organizational

performance), with study 3 having organizational performance time-lagged by one month.

Findings –All direct effect hypotheses are supported, although firm size interacted significantly with firm

strategy showing smaller not larger-sized firms leverage firm strategy to achieve superior retention benefits.

This was against hypothesis 5a in all three studies. Studies 2 and 3 supported the moderated mediation

hypothesis, with firms of larger size having a stronger indirect effect from firm strategy on firm performance

while employee retention mediated the influence of firm strategy on firm performance. Finally, dominance

analysis found that a quality differentiation strategy was the key strategy across all studies and outcomes. We

discuss the implications for organizations.

Practical implications –The first managerial implication from the study is that small and medium sized

firms would benefit both from developing a deeper understanding of the strategic alternatives open to them

and placing a greater emphasis on the implementation of their selected strategic approach. A second

managerial implication relates to findings indicating that retention generally, and top talent retention

specifically, is positively related to firm strategy and firm performance. Given the importance and challenges

of staff retention, particularly in the current environment where there are significant skill shortages, these

results suggest that small and medium sized business would benefit from considering how strategy can create

an organizational environment that is attractive to employees and support stronger retention outcomes as a

mechanism for driving both retention and performance.

Originality/value –The study makes three major contributions. First, it examines firm strategy and extends

the focus on firm performance by including not only employee retention but also top talent retention,

responding in part to the call to develop and refine performance measures (Lieberman, 2021). Second, beyond

using retention as a mediator, firm size is included as a moderator and a moderated mediation model is

ultimately tested. Third, we conduct dominance analysis to identify the key firm strategy that influences firm

performance and retention. Ultimately, this paper asks: what is the role of firm strategy on New Zealand SME

performance, and what influence does retention and relative firm-size play.

Keywords Firm strategy, Firm performance, SMEs, Employee retention, Moderated mediation,

Dominance analysis

Paper type Research paper

IJM

45,9

1772

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/0143-7720.htm

Received 26 October 2023

Revised 5 April 2024

5 July 2024

Accepted 13 July 2024

InternationalJournal of Manpower

Vol. 45 No. 9, 2024

pp. 1772-1796

© Emerald Publishing Limited

0143-7720

DOI 10.1108/IJM-10-2023-0633

Introduction

Strategic planning (Batra et al., 2018), staff retention (Haar and White, 2013), firm

performance (Jia and Bradbury, 2021) and their interplay are key areas of interest for

researchers, with staff turnover continuing to be a significant challenge for New Zealand

firms, with average annual staff turnover sitting at approximately 20% while the

recognised cost to firms is estimated to be three times the salary of any person who has

held a position for 12 months or longer One substantive lens to understand firm

performance, through the establishment of a competitive advantage, is Porters generic

competitive strategies framework. This framework focuses on the pursuit of competitive

advantage through a cost leadership, differentiation, cost focus and/or differentiation

focus strategy (Porter, 1980,1985,1991). It is a framework that continues to be applied by

researchers as a valid mechanism for understanding how the specified strategic

orientations independently, or in unison, provide firms with a competitive advantage,

with many financial and non-financial outcomes found to be associated with their

emphasis. It is also a framework that has been found to be supported by both meta-

analytic studies (Campbell-Hunt, 2000) and longitudinal studies focused on SMEs (Leitner

and G€

uldenberg, 2010). For the purposes of this research, we have applied the generic

competitive strategies framework developed by Porter given its evident broad application

and evident validity. It is a foundation that continues to be relevant, while it is recognized

that it should be considered within the context of Porters own work focused on developing

a dynamic theory of strategy, the development of the dynamic capabilities frameworks

and the resource based view of strategy.

However, there is ongoing debate as to the “intellectual sustainability” of the concept of

competitive advantage (French et al., 2011), in part because its definition continues to allude

consensus (Lieberman, 2021), Nevertheless, Lieberman goes on to state that “we should

regard competitive advantage as a conceptual umbrella for performance comparisons and

focus our attention on developing and refining performance measures (p.29)”.

Porters framework has meta-analytic (Campbell-Hunt, 2000) and contextual (Lee et al.,

2021) support, while studies of how New Zealand (NZ) SMEs use generic strategies are

limited. Rattray et al. (2007) explored NZ manufacturing firms and their strategies using a

small sample (n539), Shane and Kolvereid (1995), explored firm strategy across three

countries, including 138 NZ firms, finding no links to firm performance, and Davenport et al.

(1998), showed that firm strategy was important, while utilizing a case study methodology.

Research has however considered specific strategic practices of SMEs in NZ examining, for

example, international network engagement and informal partnerships (Fath et al., 2021;

Yata and Hurd, 2021) and the establishment of a competitive advantage through foreign

direct investment (Kang et al., 2021).

In this paper we initially propose that firm strategy plays an important role on firm

performance. There is significant supporting evidence for this relationship in the literature as

outlined previously. We next examine the relationship between employee retention and firm

performance, with meta-analysis showing that firms that retain their workforces are more

likely to outperform their competitors. Park and Shaw (2013) proposed that, “on average,

organizations with low turnover rates have accumulated much human capital. When

employees leave, replacement employees cannot equal the lost human capital until much

time passes” (p. 269). Similarly, D



ıaz-Fern

andez et al. (2014) stated that “employees play a

relevant role in firm competitiveness due to their personal competencies and the human

capital they constitute for the organisation” (p. 205). There is also evidence that for new

ventures retention is particularly important, with Gjerløv-Juela and Guenther (2019) finding

that “new ventures only benefit from early employment expansion in the long run when

employee turnover is low, while initial employment growth reduces survival in the long run

when employee turnover is high” (p. 81).

International

Journal of

Manpower

1773