Implications of Resource-based theory for HR executives

This resource-based analysis has a number of implications for HR execu- tives. In general, it highlights the fact that HR executives play an important role in managing the firm’s human assets, those that possess the great- est potential for being sources of sustained competitive advantage. More specifically, it provides guidance regarding the management of the HR function in organizations in ways that will create competitive advantage. Four of these major implications are outlined below, with questions to help guide the HR executive in managing the function.

1. The value of people and their role in competitive advantage. Knowing the economic value of the firm’s human resources is a necessary precon- dition before any HR executive can begin to manage the function strate- Reichheld (1996) notes that people contribute to firms in terms of efficiency, customer selection, customer retention, customer referral, and employee referral. People play an important role in the success of any firm, but which people do so, and how they contribute, may vary across firms. This knowledge is a necessary starting point for any HR executive to act as a strategic partner.

For example, research indicates that firms that rely heavily on innova- tion and product development (e.g. Merck) argue that their research and development (R&D) scientists’ ability to develop successful new products is the major thing that distinguishes those companies from competitors. Manufacturing firms such as Dell Computer, on the other hand, emphasize the production efficiency advantages they can gain through harnessing all of their peoples’ skills and effort. Finally, service-oriented firms, such as Continental Airlines, note that the planes, routes, gates, and fares are virtually identical within the industry. Their competitive advantage can only come through efficient, friendly service that makes fliers want to make their next flight on Continental.

Similarly, while all of the firm’s people are important, some provide greater leverage for competitive advantage. Because of the need for inno- vation, Merck’s R&D scientists provide greater leverage for success than do the hourly manufacturing employees. On the other hand, it is the hourly line employees (ticket agents, flight attendants, gate crews, and baggage handlers) who directly impact the flying experience that have a relatively stronger impact on competitive advantage for Continental Airlines.

Thus, HR executives must first understand the role of the firm’s people in competitive advantage before being able to make decisions about how to position the deliverables of the function. This leads to the following questions for these executives:

• • On what basis is the firm seeking to distinguish itself from competi- tors? Production efficiency? Innovation? Customer service?
  • Where in the value chain is the greatest leverage for achieving this differentiation?
  • Which employees or employee groups provide the greatest potential to differentiate a firm from its competitors?

2. The economic consequences of HR practices. Once an HR executive understands the specific ways in which the firm’s people provide value, it is necessary to examine the value that HR provides or can provide. Research has uncovered a relationship between HR practices and the financial per- formance of firms (Huselid 1995; MacDuffie 1995; Youndt et al. 1996). While this research is promising, more research is needed on how, exactly, this impact is At least two possibilities exist.

First, HR practices may be important levers by which firms develop human capital and employee commitment. It is the HR practices that can directly impact the skills of the workforce that can provide value to the firm. These practices also can help to develop committed employees who are willing to allocate their discretionary behavior toward organizational ends (MacDuffie 1995; Wright et al. 1996). In other words, HR practices play an important role in developing the human assets that provide com- petitive advantage.

It is also important to understand that HR practices and the HR function incur costs for organizations. HR can impact firm performance through its efficiency in developing the human assets that are a source of competitive advantage (Ulrich 1997). The products and services provided by the HR function can be too many or too few, of high quality or of low quality, directly linked to business needs or unrelated to the business. For example, HR practices developed because they are the latest fad, without a careful analysis of their ability to meet strategic business needs, are both excessive and inefficient. Similarly, the failure to develop practices that will help address business needs results in less than optimal organizational effec- tiveness. Finally, HR practices designed to meet business needs that are delivered at excessive cost or with low quality negatively impact the firm’s financial performance. HR executives need to assess both the menu of HR practices and services offered, as well as the quality and efficiency in their delivery.

As part of Continental Airlines’ turnaround, for example, the HR func- tion took a long look at the services it provided and how efficiently those services were provided. The result of this analysis was the elimination and consolidation of a number of training programs that simply were unrelated to the business while keeping some of the remaining training programs internal to the firm, the outsourcing of benefits and some train- ing/development activities, and the development of a variety of variable pay plans (the on-time bonus, management bonus plans, profit sharing, etc.). The firm has continued exploring further outsourcing and strategic partnerships as ways to reduce the costs of the function. Finally, in an effort to remain close to its customers, the HR function surveyed the company’s officers regarding the importance of the services provided by HR as well as HR’s effectiveness at delivering those services. This effort will identify areas for further improvement.

HR executives seeking to explore the value created by their functions need to ask the following questions:

• • Who are your internal customers and how well do you know their part of the business?
  • Are there organizational policies and practices that make it difficult for your internal clients to be successful?
  • What services do you provide? What services should you provide? What services should you not provide?
  • How do those services reduce internal customers’ costs or increase their revenues?
  • Can those services be provided more efficiently by outside vendors?
  • Can you provide those services more efficiently?
  • Do managers in the HR function understand the economic conse- quences of their jobs?

3. Comparison of HR practices with competing firms. The previous two points focus on the HR executive’s attention within the organization. In a competitive environment, however, one cannot ignore the actions of competitors, and this is also true of It is necessary to examine the HR functions of competitors to gain an understanding of what HR practices and relationships define the present competition. This information is only valuable insofar as it is used for developing strategies for changing the competitive landscape to a firm’s advantage.

Such benchmarking activity has become almost commonplace in indus- try as firms look both within and outside their industries seeking the ‘best practices’. Benchmarking provides information that can be valuable or useless, depending upon how it is used. If the goal of the activity is simply to identify the HR practices of successful firms in order to imitate them, then the costs will likely outweigh the benefits. Benchmarking identifies the rules of competition in an industry and can be particularly valuable in providing information on two issues.

First, it helps firms to identify what superior practices the competition is engaged in which might provide them with a competitive advantage until other firms are able to imitate it. For example, Nieman Marcus, the upscale retailer, implemented a sophisticated applicant tracking system that sig- nificantly reduced its recruiting costs. Because the system was purchased from an outside vendor, it did not take long for competitors to imitate the advantage through implementing similar systems. Had competitors not identified the system as an advantage, however, their financial performance might have suffered needlessly.

Second, benchmarking should be used to identify ways to leapfrog com- petitors. This is accomplished through developing innovative HR practices and is especially successful if they are ones that competitors will find it costly or difficult to imitate. For example, one of Merck’s manufacturing plants shifted to a variable pay system resembling a gain-sharing type plan. This plan has been hugely successful even while other plants in the industry and geographic area have been disbanding such plans. Why did it work at Merck? Merck’s manufacturing managers attribute the success to the fact that the company has traditionally had a culture that is characterized by high levels of trust between employees and management. The compensa- tion system, while imitable in formulas, structures, and procedures, was not imitable in practice since its success was contingent on Merck’s unique history and culture.

HR executives need to understand their functions in relationship to competitors as a means of identifying which practices should be copied to maintain competitive parity, which practices can be innovatively delivered to provide temporary advantage, or which practices can be linked to the unique situation (culture, history, other management systems, etc.) of the firm in order to gain sustainable competitive advantage. This understand- ing leads to the following questions for HR executives:

• • How do the workforce skills of your competitors (particularly in key jobs) compare to those in your firm?
  • How does the commitment level of your workforce compare to that of competitors?
  • What are your competitors’ HR functions doing in terms of practices and relationships with line managers? How can you beat them by doing things better or differently?
  • What unique aspects of your firm (e.g. history leadership, culture, and so on) might allow you to develop and/or maintain a more highly skilled and highly committed workforce?
  • What HR practices need to be developed or maintained to exploit these unique aspects of your firm?
  • Given your firm’s history and culture, what unique HR practices might you be able to implement more efficiently and effectively than your competitors?

4. The role of the Human Resources function in building organizational A constant tension exists in the trade-offs between focusing decision-making and resource allocation on the short-term and long-term in most organizations. This conflict also exists within the HR function. Many HR functions are struggling so hard to meet current needs that they have little time to explore long-term organizational plans. This tendency must be broken if HR executives want to play the role of strategic partner.

For example, a high-tech manufacturing firm has seen tremendous growth in both revenues and headcount over a four-year period. This growth resulted in the HR function struggling to keep up with the hiring and training needs of a firm growing by 40 percent per year. Such growth also made it difficult for the HR function to pay attention to developing the organizational infrastructure necessary to maintain the growth. During the last two years, the HR function in this firm began investing in developing organizational capability through the creation of a succession and devel- opmental planning system for the management team and a HR planning system for the rest of the organization. Without such an investment, the firm’s growth prospects would have been substantially limited.

In spite of the need to deliver the traditional HR services to meet the organization’s current needs, HR executives must consider the future orga- nization’s needs by answering the following questions:

• • Which of the firm’s resources and capabilities provide temporary or sustainable competitive advantage now? Five years from now? Ten years from now?
  • What will be the competitive landscape 5–10 years from now in terms of your firm’s product markets and labor markets?
  • What kind of human resources will your firm need to compete suc- cessfully five years from now? Ten years from now?
  • What types of HR practices are needed today to build the organization needed in the future?

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