Human resources and sustainable competitive advantage

The VRIO analysis above illustrates how a variety of firms have attempted to develop their human resources to provide sources of sustainable com- petitive advantage. The VRIO framework (summarized in Table 3.1) pro- vides a tool to assist managers to evaluate the potential for specific firm resources to be sources of competitive disadvantage, competitive parity, competitive advantage, and sustained competitive advantage. According to this framework, aspects of human resources that do not provide value can only be a source of competitive disadvantage. These resources or activities are ones that HR executives should be discarding from the HR function. Aspects of human resources that provide value, but are not rare, are sources of competitive parity. These resources are not to be dismissed; not to have them is a source of competitive disadvantage, but because other firms possess them, they cannot provide an advantage in the competitive arena. Temporary competitive advantage stems from resources that provide value and are rare, but are easily imitated. If these resources do serve as a source of competitive advantage, then other firms will soon imitate them, resulting in competitive parity. Finally, aspects of human resources that are valu- able, rare, and not easily imitated can be sources of sustained competitive advantage, but only if the firm is organized to capitalize on these resources. Clearly the HR function, through either directly controlling or strongly influencing the characteristics of human resources in organizations, plays an important role in developing and maintaining a firm’s competitive advantage. Simply making the case that HR can influence a firm’s perfor- mance, however, is only part of the story. In order for HR to truly develop and maintain sources of competitive advantage, HR executives need to focus attention and activities toward those aspects of the firm’s resources that will provide such advantages.

Now, the potential of several types of human resources to be sources of sustained competitive advantage is examined: firm-specific versus general skills, teams versus individuals, and HR systems versus single HR practices.


Human capital theory (Flamholtz and Lacey 1981) distinguished between general skills and firm-specific skills of human resources. General skills are skills possessed by individuals that provide value to a firm and are transferable across a variety of firms. For example, all competitor firms have the potential to accrue equal value from acquiring employees with knowledge of general management, the ability to apply financial ratios, or general cognitive ability. Specific skills, on the other hand, provide value only to a particular firm and are of no value to competing firms. For example, the knowledge of how to use a particular technology used only by one firm, or knowledge of a firm’s policies and procedures provide value to that firm but usually would not be valuable to other firms.

Because general skills provide equal value to all firms, one would expect that, given even moderately efficient labor markets, these would not be a source of competitive advantage for any one organization; thus, to seek to gain sustained competitive advantage through general skills would be futile. On the other hand, there are two reasons that this does not imply that these skills are not important. First, general skills are necessary for maintaining competitive parity. For example, basic reading and writing skills are general skills that will not provide competitive advantage to any one firm; however, a firm that hired many employees who could not read and write would be at considerable disadvantage in the marketplace. Second, most organizations have defined the ‘New Deal’ between the firm and its employees. This new psychological contract (Rousseau and Greller 1994) is characterized by employers assuring that they will not guarantee employment but will guarantee employability to people (Kissler 1994). This requires providing employees with the necessary training and development that ensures them marketability to other firms (i.e. general skills). Firms that fail to invest in general skills will be unable to attract and retain competent employees.

In addition, while general skills are applicable across organizations and thus most likely to result in only competitive parity, this does not preclude gaining competitive advantage through obtaining the highest level of gen- eral skills. For example, Wright et al. (1994) argued that firms that were able to obtain the highest level of average cognitive ability would have a competitive (and possibly sustainable) advantage. We would not argue for ignoring the importance of general skills; they add value and at the highest level are rare.

Greater potential for sustainable competitive advantage stems from investments in firm-specific skills. One avenue to sustained competitive advantage is to focus on developing a firm-specific skill base within an organization, because these skills cannot be easily duplicated by com- petitors. These skills provide value to the firm, but they are not eas- ily marketable by the employees who possess them. One can accom- plish this through investing in constant training and development of employees to perform work processes and procedures that are specific to the firm (Hatch and Dyer 2004). In fact, central to the concept of orga- nizational learning is the process of developing and disseminating tacit knowledge (i.e. firm-specific knowledge) throughout the firm (Senge 1990; Miller 1996). The firm gathers the rents accruing from these firm-specific skills, while providing employees with the opportunity for growth and development.

The importance of firm-specific skills highlights the potential short- sightedness of outsourcing most, or all, of a firm’s training and develop- ment activities. Outsourced activities such as these most effectively provide general rather than firm-specific skills. While some training firms may be able to develop tailor-made programs for specific firms, these are not feasible when proprietary technologies and processes exist. In addition, the training firm that develops the tailor-made programs also acquires the skills, and can theoretically (although not ethically and possibly not legally) exploit them with competing firms. For these reasons, while some training activities can and should be outsourced, outsourcing of all training activities is not likely to serve as the lever for gaining sustainable competi- tive advantage through people.


Much of the popular literature on top management seems to point to individual CEOs, such as Lee Iaccoca at Chrysler, Jack Welch at General Electric, or Lawrence Bossidy at AlliedSignal, as sources of sustainable competitive advantage. Similarly, much of the academic work on matching human resources to organizational strategies has focused on top managers and ignored the lower-level employees (Gerstein and Reisman 1983; Gupta and Govindarajan 1984; Guthrie, Grimm, and Smith 1991). The inher- ent assumption in this research is that the skills of the workforce are all common across firms, but that highly skilled individual managers or top management teams are more rare (Wright et al. 1994). This implies that the firm with the right CEO or president might possess a source of sustained competitive advantage. While these individuals are quite valuable, if labor markets are at all efficient, they are not likely to be a source of sustained competitive advantage.

Individuals who possess valuable and rare skills are usually able to claim most of the rents that are attributable to those skills (Wright et al. 1994). An outstanding chief executive, because of the high visibility of his/her performance, will soon be approached by other organizations with higher compensation. In the bidding process for that individual’s services she or he can claim most of the rents, and, therefore, the rents will not accrue to whichever firm ultimately obtains that individual’s services.

Numerous shifts of top managers from one firm to another (e.g. Gerstner to IBM), as well as the rapidly rising top executive pay, exemplify the futility of seeking sustainable competitive advantage from the skills of one individual. On the other hand, the exploitation of the synergistic value from a large number of individuals who work together is quite costly, if not impossible, for competitors to imitate. Teams or larger groups, due to causal ambiguity and social complexity, provide greater potential to be a source of sustainable competitive advantage.

Alchian and Demsetz (1972) defined team production as ‘production in which (1) several types of resources are used, and (2) the product is not a sum of the separable outputs of each cooperating resource’ (p. 779). Because output is more than the sum of the separable outputs of each cooperating resource, it is difficult, if not impossible, to identify the spe- cific source of the competitive advantage. In other words, the competitive advantage stemming from team production is characterized as being causally ambiguous, thus making it difficult for competitors to imitate.

An additional benefit of team production is that individuals become linked in transaction-specific relationships, resulting in transaction- specific human capital. In other words, team members become involved in socially complex relationships that are not transferable across organi- zations, thus only benefiting the organization in which these relationships develop. This nontransferability requires the development of a team ori- entation, as has been exemplified among the top managers at Continental Airlines. One part of its turnaround was the replacement of thirty-six of the company’s top officers within a twelve-month time frame. CEO Gordon Bethune states, ‘Why do you think most of those VPs disappeared? Most of them could not be team players.’ This has resulted in a reorientation among the top managers at Continental to focus on team goals, instead of being strictly focused on their own personal goals (Boissueau 1995).

This highlights the importance of the HR function in developing and nurturing the relationships among organizational members. Many tradi- tional organizational development activities, such as team building and conflict resolution, are included in the HR activities of Fortune 500 com- panies (McMahan and Woodman 1992; Kotter and Cohen 2002; Beitler 2003). In addition, researchers are beginning to explore trust among orga- nization members as one determinant of firm performance (Gambetta 1988; Barney and Hansen 1994; Mishra and Mishra 1994). Clearly trust (see Chapter 5) and good relationships among organizational members are firm-specific assets that provide value, are quite rare, and are extremely difficult for competitors to imitate.


Much of the writing on Strategic HRM has focused on HR practices as a source of competitive advantage (Schuler and MacMillan 1984). The assumption is that firms that engage in the best HR practices, that is, have the best selection system, or best training program, or best reward system, etc., will have a competitive advantage over firms that fail to use this particular practice. Both the work on utility analysis of HR programs (Cascio 1987; Steffy and Maurer 1988; Boudreau 1991; Jones and Wright 1992) and empirical work on the relationship between HR practices and performance (e.g. Terpstra and Rozzell 1993) have demonstrated that HR practices do provide value to the firm.

While each of these practices provides value, VRIO analysis suggests that they are not likely to be sources of sustained competitive advantage. Given the emphasis on benchmarking to identify the most effective HR practices, any individual effective practice is easily imitated, and thus, can provide an advantage only for a short time—until competitors can copy it.

The fact that these individual practices will not likely lead to sustainable competitive advantage does not imply that these practices are unimportant and HR executives can ignore identifying the best practice for each of the various HR activities. The failure to invest in state-of-the-art selection, training, and reward systems can result in a firm having a competitive disadvantage among human resources. In addition, a series of temporary competitive advantages gained through constant innovation is still quite valuable to the firm.

The challenge for HR is to develop systems of HR practices that create a synergistic effect, rather than developing a set of independent best practices of HR (Wright and Snell 1991; Lado and Wilson 1994; Becker and Gerhart 1996). This requires a changing mindset from the traditional subfunc- tional (selection, training, appraisal, compensation, etc.) view of HR to one where all of these independent subfunctions are viewed as interrelated components of a highly interdependent system. The interrelatedness of the system components makes the advantage difficult, if not impossible, for competitors to identify and copy. It also requires investing time and energy into developing systems and structures for integrating various HR prac- tices such that they complement, rather than conflict with, one another. While this sounds quite commonsensical, conversations with a number of HR executives consistently indicate that very few HR departments have developed any such systems and structures. Firms that have developed highly integrated systems seem to have obtained a source of sustainable competitive advantage. Research on bundles of HR practices supports this notion (MacDuffie 1995; Delery and Doty 1996; Youndt et al. 1996).

The implications of this resource-based analysis using the VRIO frame- work appear contrary to much of the management thinking that empha- sizes the importance of finding the right CEO, outsourcing HR functions, or seeking sustained competitive advantage through finding one best HR practice. The analysis does not imply that these activities are not valuable, but only that they are incomplete, particularly in guiding the decision- making of HR executives. The following section examines implications of resource-based analysis for HR executives.

Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.

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