Does your company uses its people to achieve a sustainable competitive advantage that delivers greater value ?

A strategic paper on how Human Capital and business strategy can be used to advantage.

Introduction

Much has been talked and written about the topics of Human Capital and the benefits that can be achieved when it is used to create a competitive advantage. There are also many papers discussing the merit of strategy in an organisation and the performance impact that can be achieved through its deployment. Despite the volume of research, it is difficult to obtain empirical data on how the use of Human Capital and the implementation of business strategy have improved an organisationís performance. This paper therefore is a collection of findings identified in the references below that supports the building of Human Capital, the deployment of strategy through example and implementation with the assistance of state-of the-art computer software.

Fortune 1000 companies

When a business is operating in a competitive environment it is useful to reflect on how the top companies are performing. The book Creating High Performance Organization (ref. 1) contains some excellent data and conclusions following a survey of Fortuneís top 1000 companies. Whilst only 28% of the companies responded, the findings are enlightening. Looking at trading conditions two thirds of the respondents reported the following as being of significant concern:

  • Foreign competition
  • Shorter product life cycles
  • Declining markets
  • Rapid growth
  • Intense cost competition
  • Rapid change
  • Time getting products to market.
The greater an organization was impacted by foreign competition or experienced extreme business pressures, the greater they found that employee involvement had a positive impact on business. Going further, one of the significant conclusions of the survey was that Employee involvement tends to be a frequent and effective response to increased foreign competition and extreme performance pressures. There is also a strong relationship between companies experiencing these conditions and their moving decision making authority to lower organisational levels. This is an interesting finding because it implies that senior management concentrated on the strategic aspects of the business and allowed the organisations to become more nimble and responsive through delegation. In effect, Human Capital was being capitalised upon.

Human Capital

Human Capital has been used since time began to achieve a competitive advantage. It is however worthwhile looking at the value of people in high performing companies to understand how a competitive advantage was achieved. Taking a look at three top companies (ref. 2) in different business sectors, they classified their advantages as follows:

  • Research (Merck): ability to develop successful new products
  • Manufacturing (Dell): production efficiency through peopleís skills and efforts.
  • Service (Continental): efficient and friendly service.
Analysing the characteristics of Human Capital further, there are four essential ingredients: Value, Rareness, Imitability and Organisation. In order to for Human Capital to be generated all four categories must be satisfied along these lines:

Value Firms create value through either decreasing product/service costs or differentiating the product or service in a way that allows the firm to charge a premium price.
Rareness Value in the human resources is only beneficial when it is not readily available or a competitor will be seriously disadvantaged if he does not possess that characteristic.
Imitability In order to sustain the advantage that rareness and value offer, competitors need to find it hard to replicate.
Organisation In order for any characteristic to provide a sustained advantage, the firm must be organised to exploit the resource.

General skills provide equal advantage to all firms. However the lack of general skills can be a source of serious competitive disadvantage. For example, a firm that hired a significant number of people who were unable to read and write, would be at a considerable disadvantage. In effect this requires employee to be provided with sufficient training and development to ensure their marketability to other organisations.

Capitalising on Human Capital

So if a company really wishes to make use of Human Capital, the executive needs to ask himself three basic questions:

  • On what basis are you wishing to distinguish the company from competitors? Production efficiency? Innovation? Customer Service?
  • Where in the value chain is the greatest leverage for achieving this distinction?
  • Which employees or employee groups provide the greatest potential to differentiate from its competitors?
It is not practical to reflect on the questions here because they are organisation specific. However we have illustrated below two ways where advantages using Human Capital might be gained.

Example 1
An individual that possess valuable and rare skills may not be an advantage as in the case of an outstanding chief executive because of his high visibility and the likelihood of him being approached by other organisation with higher compensation.

On the other hand, the exploitation of synergistic value from large number of individuals who work together is quite costly if not impossible to imitate. Teams or larger groups, due to casual ambiguity and social complexity, provide greater potential to be a source of sustainable competitive advantage.

Example 2
The implementation of HR practices that create a synergistic effect rather than a set of independent best practices offer an advantage (ref. 4). This requires a changing mindset from traditional HR sub-functions (selection, training, appraisal, compensation) to one when where they are all inter-related. The inter-relation makes the advantage difficult, if not impossible, to copy.

Equally well the failure of the company to invest in the state-of-the-art selection, training and reward systems can result in the company having a competitive disadvantage through HR.

Strategy

We have seen from the discussions above that Human Capital can be exploited to produce a business advantage. However it must be focused on the business objectives to realise real benefits. This is supported by the conclusions of a survey carried out on companies in various stages of evolution (ref. 3). The survey concluded that firms adopting Strategic Human Resource Management (SHRM) methods outperform those employing traditional managerial and operational types of HRM. The best performing companies were those that involved all employees. The results support the principles of Strategic HRM, namely:

  • that the management of people should be considered from the standpoint of the entire organisation,
  • that there should be a close linkage between business strategy and HRM practices,
  • that line managers should be encouraged to participate in planing and implementing human resource programs, and
  • that other human resource functions should be tightly integrated with other operations in the firm.
Implementing Strategy

There are several organisational influence systems that operate in every organisation. Whilst there is some discussion whether there are twelve or more, those listed below are the most widely recognized (ref. 5).

Goals and measures Physical environment
Rewards and recognition Staffing, selection and succession
Communications Information systems and knowledge sharing
Training and development Operational/process changes
Organisational structure Ceremonies and events
Senior leadership Rules and Policies
Organisational influence systems

In order to implement a strategic business plan and align an organisation all influence systems need to be engineered. In carrying out the re-alignment there are five key points to be remembered:

  • Design and Planning is only the beginning
  • People are the buffer between an organisationís strategy and business results.
  • Management does not have direct control over peopleís actions they can only influence.
  • Telling people alone to change is inadequate; the other influence systems need be realigned too.
  • Organizational influence systems are systemic in that they interact with one another to create individual and organisational behaviours (i.e. a form of Human Capital).
As with all major projects, the implementation of a strategic business plan touches on all parts of an organisation. The key to making strategy work involves several key ingredients: Focus, Resources, senior management Commitment, Time and effort.

Benchmarking and maintaining an advantage

During the last ten years benchmarking has become an increasingly valuable tool and has achieved recognition in its own right. In terms of strategy and Human Capital benchmarks are used as a barometer to measure performance and identify where to make changes. Typically benchmarking:

  • identifies rules of competition in the industry
  • helps identify what superior practices the competition is engaged in
  • helps identify ways a firm can leapfrog or surpass competitors.
Computer Systems that help realise sustainable advantages

Any tool that helps efficiently implement the strategies within the influence systems will offer a strategic benefit particularly when the business plan is revised or the results need to be analysed. The obvious area to start looking for that business tool is with your installed Human Resource Management System. If it doesnít comprehensively support the strategic functions listed below then it is probably time to upgrade or even revamp. The business benefits will quickly outweigh the costs within a short space of time if you get your strategy right.

  • Strategy: definition and communication of strategy for all levels in an organisation, individual job specifications and performance agreements.
  • People management from recruitment, skills matching, career development to job requirements and succession planning
  • Organization capability: competency and skills management
  • Benchmarking: So that you know how you are performing at all times.
Conclusion

Human Capital is available now in every organisation waiting to be capitalised upon. Its deployment in accordance with an organisationís strategic business plan will provide genuine business benefits that will in turn deliver greater value to shareholders.

As previously stated a competitive advantage can be gained through synergistic HR practices. If the synergy can be extended to integrate with the organisationís business plan then an organisation has the capability to create a competitive advantage through its people.

For this advantage to be sustainable, systems must be in place that record and maintain the base-line parameters. This then allows performance to be measured and facilitates the re-alignment of the organisation to meet the evolving business plan.

References

1 Edward E Lawler Susan A Morhrman, Gerald E Ledford; Creating High Performance Organizations ; San Francisco: Jossey-Bass, 1995
2 Jay B Barney and Patrick M Wright; On Becoming a Strategic Partner: The Role of Human Resources in Gaining Competitive Advantage; Human Resource Management Spring 1998, Vol. 37, No 1 Pp. 31-46
3 Tung-Vhun Huang,The Strategic Level of Human Resource Management and Organizational Performance: An Empirical Investigation, Asia Pacific Journal of Human Resources 36(2)
4 Becker & Herhart 1996; Lado & Wilson, 1994; Wright & Snell, 1991
5 J Galpin ;When Leaders Really Walk the Talk: Making Strategy Work Through PeopleTimothy , Watson Wyatt Worldwide, Practice Leader for Merger & Acquisition Services; Human Resource Planning 1998, Volume 21.3

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