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THE IMPACT OF PARTICIPATIVE MANAGEMENT ON ORGANIZATIONAL PERFORMANCE AND EMPLOYEE
EFFECTIVENESS
Laura Chang Leng Yi
Bachelor of Finance (Honours) 2012
Pusat Khidmat MakJumat Akademik UNlVERSm MALAYSIA SARAWAK
P.KHIDMAT MAKLUMAT AKADEMIK
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THE IMPACT OF PARTICIPATIVE MANAGEMENT ON ORGANIZATIONAL
PERFORMANCE AND EMPLOYEE EFFECTIVENESS
by
LAURA CHANG LENG YI
This thesis is submitted in partial fulfilment of
the requirements for the degree of Bachelor of Finance with Honours
(Finance)
Faculty of Economics and Business
UNIVERSITI MALAYSIA SARAWAK 2012
IMPAK PENGURUSAN SECARA PENYERTAAN TERHADAP
PRESTASI ORGANISASI DAN KEBERKESANAN PEKERJA
oleh
LAURA CHANG LENG YI
Projek ini merupakan salah satu kerperluan untuk
Ijazah Sarjana Muda Kewangan dengan Kepujian
(Kewangan)
Faculti Ekonomi dan Perniagaan
UNlVERSITI MALAYSIA SARA W AK
2012
Statement of Originality
The work described in this Final Year Project, entitled
"The Impact of Participative Management on Organizational Performance and Employee Effectiveness"
is to the best of the author's knowledge that ofthe author except
where due reference is made.
(Date submitted) (LAURA CHANG LENG YI)
23806
Pengesahan Pelajar
Saya mengakui bahawa Projek Tahun Akhir bertajuk
"Impak Pengurusan Secara Penyertaan Ke Atas Prestasi Organisasi dan Keberkesanan Pekerja"
ini adalah hasil kerja saya sendiri kecuali nukilan, petikan, huraian dan ringkasan
yang tiap-tiap satunya telah saya nyatakan sumbemya.
(Tarikh penyerahan) (LAURA CHANG LENG YI)
23806
ABSTRACT
THE IMPACT OF PARTICIPATIVE MANAGEMENT ON ORGANIZATIONAL
PERFORMANCE AND EMPLOYEE EFFECTIVENESS
by
Laura Chang Leng Yi
This study focuses on investigating the impact of participative management on
organizational performance and employee effectiveness in Malaysian Small and Medium
Sized Enterprises (SMEs). Participative management was represented by the five job
characteristics found in Job Characteristics Model (JCM) which are skill variety, task
identity, task significance, autonomy and task feedback. Specifically, this study aimed to
investigate the impact of each of the job characteristics on organizational performance and
participative management respectively with mentoring as a moderator. Twelve hypothesized
relationships were tested. Data were collected from a total of 250 employees in Malaysian
SMEs. Non-probability method was utilized to distribute well-structured questionnaires. The
empirical findings were limited to small samples from various business sectors. Data
coUected was analysed using SPSS Version 17.0 for Microsoft Windows and SmartPLS 2.0.
Confirmatory factor analysis, convergent validity, discriminant validity and reliability test
was executed to gauge the measurement model, and t-value utilized to assess structural
model. The results obtained were appealing as participatory techniques do not propel
participative management as having a positive impact on organizational performance where
as only skill variety and task significance have a positive impact on employee effectiveness.
Mentoring only moderates the relationship between participative management and employee
effectiveness. This study may be practical for executives to comprehend the scope of
participative management and its implications towards better strategic planning to achieve
organizational goals. While more research is being done in this area, this paper has
demonstrated the extend of participative management's impact on organizational
performance and employee effectiveness to both scholars and practitioners.
ABSTRAK
IMPAK PENGURUSAN SECARA PENYERTAAN KE A TAS PRESTASI
ORGANISASI DAN KEBERKESANAN PEKERJA
oleh
Laura Chang Leng Yi
Kajian ini memberi tumpuan kepada penyiasatan tentang impak pengurusan secara
penyertaan ke atas prestasi organisasi dan keberkesanan pekerja dalam perusahaan Industri
Kecil dan Sederhana (IKS) di Malaysia . Pengurusan secara penyertaan diwakili oleh lima
sifat kerja yang tersenarai dalam Model Sifat Kerja iaitu kepelbagaian kemahiran, identiti
tugas, kepentingan tugas, autonomi, dan maklum balas kerja. Justeru, kajian ini khususnya
bertujuan untuk menyiasat impak setiap sifat kerja tersebut ke atas prestasi organisasi dan
pengurusan penyertaan dengan pembimbing sebagai moderator. Dua belas hubungan
hipotesis telah diuji . Data dikumpul daripada 250 pekerja dari IKS Malaysia. Kaedah bukan
keberangkalian diguna untuk mengedar borang soal selidik. Keputusan empirical terhad
kepada sampel kecil dari pelbagai sektor pemiagaan. SPSS Version 17.0 for Microsoft
Windows dan SmartPLS 2.0 digunakan untuk mengana'lisa data yang terkumpul. Ujian seperti
analisis factor konfirmatori , kesahihan konverger, kesahihan diskriminan dan
kebolehpercayaan dilakukan untuk mengukur model pengukuran dan nilai-t digunakan untuk
meni lai model berstruktur. Didapati bahawa keputusan yang diperolehi adalah menarlik
kerana penyertaan pekerja tidak memberi impak yang positif ke atas prestasi organisasi tetapi
sebaliknya hanya kepelbagaiaan kemahiran dan kepentingan tugas memberi impak yang
positif ke atas keberkesanan pekerja. Pembimbing hanya berfungsi sebagai moderator dalam
hubungan antara pengurusan secara penyertaan dan keberkesanan pekerja. Kajian ini boleh
menjadi praktikal untuk eksekutif bagi memahami skop dan imphkasi pengurusan secara
penyertaan terhadap perancangan strategik untuk mencapai matlamat organisasi . Dalam pada
itu, ban yak kajian telah dijalankan berkaitan dengan tajuk ini, kajian ini juga telah
menunjukkan takat impak prestasi organisasi dan keberkesanan pekerja kepada ilmuan dan
pengamal.
ACKNOWLEUGEMENTS
During the course of this research many have helped and guided me along the way.
Without them, this paper would have never come to a completion.
To begin, I would like to thank Dr. Lo May Chiun, my most inspiring lecturer and
supervisor who humbly and patiently guided and advised me through. From her vast
experience in producing research papers, my knowledge of research and thesis writing
expanded. She always motivates and inspires me to go beyond what 1 am able to do. My
gratitude also goes to all the time spent on ensuring my paper would be the best. Indeed, there
is no way I can repay her for all her sacrifice and heartfelt encouragements. It will always be
my honour to be under her guidance.
My heartfelt gratitude also extends to Universiti Malaysia Sarawak for the
opportuni ty to venture into this course especially to Prof. Dr. Shazali Abu Mansor (Dean of
Faculty of Economics and Business), Prof. Dr. Abu Hassan Md Isa (Final Year Project
coordinator of Faculty of Economics and Business), all lecturers and staff involved for being
so accommodating. It was through their guidance that I could comprehend and complete the
work upon my shoulder.
To the employees from the medium-sized manufacturing sectors of different business
sectors who have so kindly spent their quality time in responding to the long and detailed
questionnaires during the course of data collection.
My family has always been the backbone of my journey in this university. My dad,
Peter Chang and mum, Sheila Chang have given their 'love, prayers, moral and financial
support through the course of this research . Not forgetting my siblings, Sarah Chang and
Kevin Chang for their endless support. I am grateful for them.
I also want to thank friends who have always been by my side physically or morally
through the good and hard times of this research. Ng Soo Ki, Kelly Usit, Tan Seow Lin, Teoh
Ker Li, EI ie Fong and Mah Jih Jing. They have all been great advisers and helpers. Their
friendship to me is priceless.
My special appreciation goes to Ms Winnie Wong and Ms Lau King Nim for sharing
their experience in producing an undergraduate thesis and so willingly spending their time to
guide and correct my work. Their kindness inspired me to continuously pursue this research
despite certain failures.
Finally and most importantly, I want to thank my God for always being faithful and
my source of strength. It is my great joy to dedicate this piece of work to all the people
mentioned above. Truly, no man walks alone.
LIST OF TABLES
Table 2.1: Theories of Job Satisfaction .....................................................31
Table 2.2: Definitions in Terms of Annual Sales Turnover
and Full Time Employees ....................................................... 37
Table 2.3: Foundational Premises of Social Exchange Theory ..........................42
Table 3.1 : Development of Questions for Each Variable ..... .. ...................... .. . 57
Table 4.1: Demographic Profile of Employees............................................76
Table 4.2: Loading and Cross Loading Table ........................ .. ............... .... 80
Table 4.3: Result of Measurement ModeL ...... .. ........ .. ...............................81
Table 4.4: Summary of Measurement Table.; ............................................ .83
Table 4.5: Discriminant of Model Constructs ..... " ...... '" .... . ........................ 84
Table 4.6: Result of Reliability Test.. .......................................................85
Table 4.7: Results of Communality and Redundancy ................................... .86
Table 4.8: Correlations Test. .................. . ............. .. .......................... . ... 92
Table 4.9: Path coefficients and hypothesis testing ........ . ............. ... ..............90
XVI
LIST OF FIGURES
Figure 2.1 : Framework of Impact of Participative Management on
Organizational Perfonnance and Employee Effectiveness
in Malaysia .......... ... ...................................................46
Figure 4.1 : Research Model ... ..... . .. ... .......... ... . . . . .... .... ..... ........ .. , ... 77
Figure 4.2: Research Model with beta values ...... . ....... .... ..... ... ............. 87
Figure 4.3: Research model with t-value ........ . ............ .. . ......... ....... . .... 91
xvii
I Pusat Khidmat Maldumat Akademik UNIVERSm MALAYSIA SARAWAK
T ABLE OF CONTENTS
LIST OF TABLES..........................................................................................................xvi
LIST OF FIGURES ...............................................................................xvii
CHAPTER ONE: INTRODUCTION
1.1 Background...................................................................................... 1
1.1.1 The Malaysian Scenario ... . ............................................... . .........5
1.2 Problem Statement. .............. . .................................... . .........................6
1.3 Research Objectives .............................................................................7
1.4 Research Questions ................................................................... . ......... 8
1.5 Definition of Key Terms ....................................................................... 9
1.6 Significance of the Study ...................................................................... 9
1.7 Scope of the Study .............................................................................. 10
1.8 Organization of the Chapters .................................................................. 11
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction..................................... . ..................................... . .......... 12
2.2 Definition of Models .. " ....... . . . .. . .. . .. . .. .... .. . ....... . ...... ....... .. . .. . .. . .. ... . .. . ... i 2
2.3 Organizational Performance ........................ . ................. .. ................. . ..... 13
2.3.1 Return on Assets ..................................................................... 15
2.3.2 Return on Sales ............................................................. '" ...... 16
2.3.3 Sales Growth ............................... . .......................................... 16
2.4 Participative Management. ...................................................................... 17
Xli
2.4.1 Skill Variety ....... .. ........ .. ............ . ................. .. ...................... 21
2.4.2 Task Identity ........................................................................ 22
2.4.3 Task Significance ................. . .................... ... ................ ....... ... 23
2.4.4 Autonomy............................................................................. 24
2.4.5 Task Feedback ... . .... . .................. ... ................... . ....... . . .. ......... . 26
2.5 Employee Effectiveness .............................. . ............ .. .. .. ..... . ................. 27
2.5.1 Job Perfonnance ....................... ... ........ . ......... .. ......... . ......... . ... 29
2.5.2 Job Satisfaction ...... .. ......... .. . . .. ...... ........... . .. . .......................... 30
2.5.3 Job Retention .. .. ........... . ............................ . ........ . . .... ....... . .... . 32
2.6 Mentoring .......... .. ......................... . .................................................. 33
2.7 Small Medium Enterprises (SMEs) ...... .. ........ ... ........ . ................... . ....... ... 35
2.8 Underlying Theory ... . ......................................................................... 37
2.8.1 Resource Based Theory ............................... ....... ............. .. ....... 38
2.8.2 Social Exchange Theory ................. .... ... . ... . .......... . .......... ... ...... .40
2.9 Theoretical Framework....................................................................... .43
2.9.1 Gap in the Literature ............................................................... 44
2.9.2 Justification of Theoretical Framework .......................... . ............... 44
2.9.3 Description of Variables ........... .. .............................................. 44
2.10 Development of Hypothesis .................................................. .. ............. 46
2.11 Summary. . ...................................................................................... 51
CHAPTER THREE: DATA AND METHODOLOGY
3.1 Introduction ... ......... . ..... . .............. . ... . ................ ... ................ .... ........ 52
3.2 Research Site ... ..... ................................. ... ................. . .............. ....... . 52
3.3 Research Design, Sample and Procedure ................ . ......... .. ........ ... ........ ... . 53
3.3 .1 Data Collection Procedure ..... ..... .. . ................................ ... ........ .. 54
3.4 Research Questionnaire .. .. ............................. .. ............... .. .. . ................. 54
Xlll
3.4.1 Structure of Questionnaire.. " .............................................. ....... 55
3.5 Measures.. .... ...... . .... . ....................................................................... 57
3.5.1 Organizational Performance ................. . ............. . .................. . .... 58
3.5.2 Participative Management. ..................................... ................... 59
3.5.3 Mentoring... . ..... . .............................................. '" ......... ........ 61
3.5.4 Employee Effectiveness ..................................... . ... . .................. 62
3.6 Pilot Study . .... ................................................................................. .63
3.7 Statistical Analysis ..............................................................................64
3.7.1 Descriptive Statistic .......................... . ...... . ...... . .........................64
3.7.2 Factor Analysis ...... . .. .. ................................. . ........................ ...64
3.7.3 Reliability Analysis ........................... . .............. . ... . ...... ........... . . 65
3.7.4 Factor Independence Analysis ..... ....... . ............... . ............. . ...........66
3.7.5 Partial Least Squares ................ .............................................. . ... 66
3.8 Summary..... .......................................................... . ......................... 72
CHAPTER FOUR: RESULTS
4.1 Introduction................................................ . ...... . ............................. 73
4.2 Demographic Profile .......................................................... . ..................73
4.3 Goodnes of Measures ....... . . . ...... . ............. . ............... . ........................ ... 77
4.3. 1 Measurement Model Results ...................................... . ... . ................78
4.3.1.1 Loading and Cross Loading .......................... . ... . ............... 78
4.3.1.2 Convergent Validity .....................................................81
4.3.1.3 t-value ....................... . ........................... . ............... . . 82
4.3.1.4 Discriminant Validity ................................................... 83
4.3.1.5 Reliability Test. ........ . ............... . .................................84
XIV
4.3.1.6 Communality and Redundancy.... .... .... . ............ . ............. 85
4.3 .1.7 Global Fit (GoF) ............................... .. ........................86
.4 Restatement of Research Hypotheses ......................................................... 88
4.5 Intecorrelations among Study Variables ...................................................... 88
4.6 Assessment of the Structural Model ...........................................................88
4.6.1 Hypothesis Testing .......... . .. . .... . ..................................................90
4.7 Findings of Hypothesis Testing ............................................................... 89
4.8 Summary.................. . ............................ .......................................... .91
CHAPTER FIVE: DISCUSSION AND CONCLUSION
5.1 Introduction..................................... . .. ........ . .................... .. ...............93
5.2 Backdrop..........................................................................................93
5.3 Discussion...... .. ... .... ...................................... .. ......... ... .................... .. 94
5.4 Implications........................................................... " .. .. ..... ..... ........... . 1 02
5.4.1 Theoretical Implications ............................................................... 102
5.4.2 Practical Implications .................. . ........................................... . ... l 04
5.5 Strengths and Potential Limitations ............................................................ 106
5.6 Directions for Future Research ............ . .... . .......... .' ........................ " ...... . ... 107
5.7 Conclusion...................... . ....................... . ............ ....... .. ................. . .. 1 09
REFERENCES................. ,........................................................ '" .......... 110
APPENDIX A
APPENDIXB
xv
CHAPTER ONE
INTRODUCTION
1.1 Background
In the 1990s, the leaders in the working world have been working towards
developing people-oriented behaviour. Organizations in various countries such as
America, Japan and Taiwan have begun to implement Participative Management into
their governance. This method of management received great attention as it has been
proven that it brings more benefit than harm to subordinates and also to relationships
between subordinates and managers.
Participative Management is a kind of management style In which
subordinates share a significant degree of decision-making power with their
superiors (Robbins, 1991 :243). Subordinates are empowered to make decisions and
be involved in the organization's process of decision making. In this process
employees ' involvement may differ such as problem solving, goal setting, direct
involvement in work decisions, representation on policy-making bodies and
selecting new co-workers (Cotton et at , 1988). On the financial part, profit sharing
and stock ownership are also participative management patterns. This definition was
used by a research done on Taiwanese firms which were applying US methods of
participative management. Thorough research found participative schemes in
Taiwanese firms showing lower turnover rates and absenteeism rates (Huang, 1997).
Participation was defined as 'opportunity to influence decisions', and is seen as
surrounding both structures and processes of power sharing. A participative system
I
is one in which opportunities are broadly pooled among all organization members
(Ryan, 2000). With the wide encompassment of power, conflict of interest and
meeting a consensus have to be considered as this can take away much of time
resources.
Participative Management are approaches that 'move one or more of the
following further down in the organization; infonnation, knowledge, rewards and
power (Lawler, 1986). Examples of such are presenting employees with the business
plans, teaching employees to be more involved in business with the right techniques
and skills, and providing a platfonn for employees to speak out their suggestions and
opinions about a certain change or move in the finn. Teaching employees would
mean mentoring them on how to participate in activities that will affect decisions
made in the organization which will lead to better effectiveness as an employee and
improved organizational perfonnance. Mentoring will play its role as mediator in
this research assuming it helps in the finn's implementation of Participative
Management. As stated in the research by Lo & Ramayah (2011), mentoring plays
an important role in influencing subordinates. Also, ,that a proper mentoring system
brings greater retention, better charted careers, greater leadership competency, and
most importantly has ready leaders available at the right time. Hence, the extent to
which mentoring would playa role in participative management is analysed.
By empowering employees with a certain degree of trust in decision making,
employees would induce a degree of commitment to task - over the long run - that
hierarchical direction could not consistently inspire (Lovrich, 1986). Employees
would thoroughly understand the organizational goals and their relationship to those
goals and its impact towards the organization. Employees would sense his or her
2
contribution to the work that directly affects organizational perfonnance as well as
lead to better job perfonnance and satisfaction. Being knowledgeable about the
decisions in the organization enables employees to work to their full potential in
their most effective way. The use of strict hierarchical controls as a means of
organizational management seems "unnatural" at best and perhaps even dangerously
subversive to democratic nonns and the maintenance of democratic civic virtues
(Hummel.,1982). This hardly occurs in organizations placing much weight on
democracy in its governance and social practice emphasizing fairness with equality.
Skill variety, Task Identity, Task Significance, Autonomy and Task Feedback are
elements in participative management practice which brings forth a sense of fairness
and distinctiveness in employees (Lovrich, 1986).
While perfonning their jobs employees would often think about the changes
and improvements they can make to their tasks and processes, e.g. manufacturing. A
poll of a cross-section of people in industry, conducted by Gallup for the U.S.
Chamber of Commerce, showed that employees put deep thought about means to
improve their company's perfonnance especially while perfonning the certain task
and said they would work more efficiently if they were involved in the decisions
affecting their job. Psychologically, people always want to know why they perfonn a
certain task or duty having a rationale behind it. As employees work every day in the
same field and perfonning the same task they would want to know more about the
job they are assigned to accomplish and why management makes certain decisions
which affect their jobs. Not only on the individual level but by empowering
employees through participative management they know how they as individuals
work groups can be me more productive. Additionally, previous research by Baiman
3
and Evans (1983), viewed participative management as a negotiation process
whereby each individual chooses his or her own negotiation strategy based on his or
her own infonnation. Employees hold a certain amount of private infonnation and by
negotiating; managers would be able to obtain necessary infonnation to better
improve decision making considering different aspects of the organization especially
those that directly affect financial perfonnance. In situations where the employee
holds more infonnation than the manager a participation-based management control
system allows the subordinate to reveal or communicate some of his private
information which may then be incorporated into the finn's perfonnance for optimal
value.
As for the effect of participative management on organizational perfonnance,
Lebas (1995) mentioned that measuring perfonnance and managing performance are
interactive and cannot be separated. By separating the two, the results gain from a
study of the impact would be inaccurate. While organizational perfonnance is an
indicator which measures how well an enterprise achieves their objectives
(Venkatraman and Ramanujam, 1986), the concept of effectiveness is a ratio
indicating that the two entities of effectiveness and efficiency are needed when
defining and measuring effectiveness of a finn. Looking at the traditional view,
organisational perfonnance is commonly referred to as financial perfonnance where
considerations of budgets, assets, operations, products, services, markets and human
resources are critical in detennining the overall bottom-line of an organisation
(Dixon, 1999; Thurbin, 1994; Smith, 1999). However, Yeo (2003) in his research on
the tangibles and intangibles of organisational perfonnance found that there is a need
to look into infonnal or alternative measures associated with learning. The
4
Pusat Khidmat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
alternatives are such in this paper of finding the impact of job performance, job
satisfaction and job retention. Therefore, this paper will seek to find the impact on
the infonnal which is employee effectiveness and formal defined by organisational
performance.
1.1.1 The Malaysian Scenario
Malaysia is a country with high power distance such that people do accept
inequality in power among institutions. Participative Management has proven to be
harder to implement in countries with higher power distance such as China (Huang
& Van de Vilert, 2003). Therefore, from this research it can be concluded that
Participative Management faces tougher execution in Malaysian organizations,
specifically Small Medium Enterprises (SMEs) and privately owned manufacturing
firms. There has been unknown research on the weight and effect of Participative
Management in Malaysia, however past leadership studies have found that
Malaysian leaders lead in a more participative and consultative style (Govindan,
20(0).
In another paper, it is reported that empowerment and its real impact on
divergent formal and non formal sectors do not ~xist (Raquib, Anantharaman, Eze &
Murad, 20 10). Globalization however has caused aggressive Asian countries to
embrace changes for better organizational performance. Malaysia falls in this
category as one of the fast growing nations in the Asian continent (Dodson, 2008).
Therefore, this research serves to find the impact of participative management with
the moderating effect of mentoring on employee effectiveness to enhance
5
management in Malaysian based firms. While past research have found Malaysian
leaders to be participative and consultative (Govindan, 2000), this research will
prove as to whether participative styles improve job performance, satisfaction and
retention. Moreover, a discovery of whether the impact of participative styles on
financial and non-financial factors with the moderating effect of mentoring was
conducted.
1.2 Problem Statement
Past studies have proven that Participative Management contributed towards
better performance less employee turnover in Northern Mexico production facilities
(Pelled & Hill, 1997). In this study, employee effectiveness is measured by Job
Satisfaction, Job Performance and Job Retention. Hence, less employee turnover
means better job retention in the organization. Also, individuals who were highly
committed to their organization and have higher job satisfaction would have less
thought of leaving the organization (Iverson and Buttigieg, 1999). "Organization of
work' and "decision making" on the other hand were found by Denison (1984) to be
significantly correlated and predictive with short term financial performance. Raising
from the past researchers it is essential that the elements of employee effectiveness
are well maintained through participative management. This research on the other
hand will serve to prove the level of impact of participative management on
employee effectiveness and organizational performance. A study by Correa and
Caon (2002), found that traditional corporate performance measurement which seeks
to find the impact on return on assets and return on sales, etc. are insufficient for
6
decision making by executives since they did not reflect the level in which the
organization is being able to meet strategic goals. The financial performance will be
measured through organizational performance with Return on Sales, Return on
Assets and Sales Growth as its variables. Employees who are aware and made part of
the decision making in the firm's financial performance would be motivated and
detennined to contribute to the growth of the firm. Therefore to fully understand the
impact a thorough research has to be made into Malaysian firms.
1.3 Research Objectives
This research will be conducted with the following objectives:
a) To investigate the impact of participative management on employee
effectiveness and organizational performance.
b) To investigate the impact of skill variety on employee effectiveness and
organizational performance.
c) To investigate the impact of task identity on employee effectiveness and
organizational performance.
d) To investigate the impact of task significance on employee effectiveness and
organizational performance.
e) To investigate the impact of autonomy on employee effectiveness and
organizational performance.
f) To investigate the impact of task feedback on employee effectiveness and
organizational performance.
7