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

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 (n = 208) 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 (n = 474) and study 3 (n = 300, 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 (n = 208) to test the initial part of our overall model. Study 2 (n = 474) and study 3 (n = 300) 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.