This CQ Dossier describes how organizations can gain a competitive advantage through human capital. The dossier describes how investment in HRM practices can enable high performing organization to realize the knowledge, skills, and abilities of the human capital within the firm. The dossier describes evidence-based best practices in choosing bundles of HR practices that empower and motivate employees to perform at their best.
Human capital is a source of competitive advantage
During the 1980s there was a paradigm shift within Human Resource Management whereby researchers and practitioners advocated for a resource-based view of the firm. This view of the firm recognized that organizations could gain a competitive advantage through leveraging human resources. Resource-based theory states that resources are important factors of a firm's competitiveness if they meet the value, rareness, inimitability, and non-substitutability (VRIN) test (Barney, 1991). The premise behind the resource-based view of the firm is that human capital is a source of competitive advantage for organizations if they pass the VRIN test: Human capital is
valuable when it is linked to indices of individual and organizational effectiveness;
rare when there is heterogeneous distribution among firms;
inimitable when there is specificity within the firm’s human capital;
human capital is non-substitutable when it is difficult to replace (Barney & Wright, 1998).
Dynamic capabilities are valuable, rare, inimitable non-substitutale (VRIN)
Since Barney’s revolutionary theory, there has been increasing scrutiny on how best to leverage human capital within the organization. With this scrutiny, researchers and practitioners now recognize the merits of a dynamic, knowledge-based capabilities approach. When a firm manages the dynamic capabilities within the firm, they can integrate, build and reconfigure internal and external competencies to address the rapidly changing environment (Ambrosini & Bowman, 2009).
Human capital as dynamic capability through Human Resource Management (HRM)
Ambrosini, Bowman, and Collier (2009) argue that managerial perceptions of the environment are not necessarily based on an objective analysis of the environment and managers may create change based solely on their own dynamically evolved cognitions. Dynamic capabilities allow organizations to gain a competitive advantage and to help organizations avoid the rigidity of developing static competencies (Ambosini et al., 2009). Thus, the goal of a dynamic capabilities view of the firm is the generation of a novel bundle of valuable, rare, imitable and non-substitutable resources (VRIN). This CQ Dossier describes how organizations can best leverage human capital through human resource management (HRM).
Developint employees' KSAOs through Learning and Development
One of the best ways in which organizations can best leverage their human capital is through implementing effective HR practices. HR practices are most effective when they facilitate the development of the knowledge within the firmthrough recruitment, training, socialization, performance appraisal and other HR practices (Lengnick-Hall, Lengnick-Hall, Andrade & Drake, 2009). It is important that organizations implement policies that create value within the firm. One of the opportunities for organizations is by the identifying the knowledge, skills, abilities, and other characteristics (KSAOs) necessary for successful performance and developing these characteristics through employee training and other developmental programs (Boon et al., 2017).
In leveraging human capital, it is important to remember that HR practices can’t be implemented in isolation. Rather, there needs to be an integration of HR practices so that the system empowers employee motivation (Lepak, Lioa, Ching & Harden, 2006). In this sense, human capital is enhanced using multiple HR practices that are integrated into a cohesive system.
AMO-Model proposes to increase employee abilities, motivation, opportunity to contribute
Recent research in the field suggests that organizations can best leverage human capital through implementing high performance work systems (e.g., Appelbaum et al., 2000). The AMO (ability-motivation-opportunity) model proposes that organizational excellence is achieved through a function of employees’ abilities, motivation and opportunity to contribute (Appelbaum et al., 2000). Human Resource Management functions can improve organizational performance by re-engineering HR practices to increase employees’ KSAOs and employee motivation.
Through improving HR practices, this gives employees the opportunity to use their KSAOs to achieve individual and organizational goals. A recent meta-analysis shows that human resource management can enhance organizational performance by creating value within human capital and through encouraging desired employee behaviors (Jiang, Lepak, Hu et al., 2012). Effective HR practices are bundled effectively so that they enhanceemployees’ skills, motivation and provide opportunities for employees to demonstrate their capabilities.
Several HRM practices enhance employee capabilities
There are several ways in which organizations can enhance the capabilities of employees. HRM practices that encourage high knowledge, skills and abilities can be emphasized to link human capital and organizational performance. These practices can include careful selection and high investment in employee training.
Link Human Resource Management to the strategy
To achieve a high performing bundle of HRM practices, it is important that organizations link HRM to the overall strategy of the firm (Wright & McMahan, 1992). In considering which bundle of HRM practices to adopt, most of the research suggests a focus on HR activities, such as selective staffing, comprehensive employee training and broad developmental efforts such as job rotation and cross utilization can enhance organizational performance.
Promote empowerment and participate problem solving
Generally, programs that promote empowerment such as participative problem solving, teamwork with job redesign, and group based incentives also are useful for an optimal balance.
Adopt HRM practices that compliment each other
It is also important that firms adopt HRM practices that compliment each other. For example, if a firm invests in a high-quality employee performance appraisal system, it is important that this is aligned with incentive systems that reward high performers (Huselid, 1995). HR programs that are synchronized and compliment each other also have additive effects through boosting empowerment among employees (Huselid, 1995).
In conclusion, this CQ Dossier provides information on how best to leverage human resources through investment in strategic HRM practices. When organizations adopt a synchronized package of HR practices that are aligned with the organization strategy, this allows for a competitive advantage.
Organizations can gain a competitive advantage through leveraging human resources
Organizations can best leverage human resources through generation of a novel bundle of valuable, rare, imitable and non-substitutable resources (VRIN) resources
HR practices are most effective when they facilitate the development of the knowledge within the firm
There needs to be an integration of HR practices so that the system empowers employee motivation
To achieve a high performing bundle of HRM practices, it is important that organizations link HRM to the overall strategy of the firm
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References and further readings
Ambrosini, V. & Bowman, C. (2009). What are Dynamic Capabilities and are They a Useful Construct in Strategic Management?International Journal of Management Review, 11, 1, 29–49.
Ambrosini, V., Bowman, C. & Collier, N. (2009). Dynamic Capabilities: An Exploration of How Firms Renew Their Resource Base.British Journal of Management, 20, 9-24
Appelbaum, E., Bailey, T., Berg, P., & Kalleberg, A. (2000).Manufacturing advantage: Why high-performance work systems pay off. Ithaca, NY: Cornell University Press.
Barney, J.B. (1991). Firm resources and sustainable competitive advantage. Journal of Management, 17(1), 99-120. Barney, J. B., & Wright, P. M. (1998). On becoming a strategic partner: The role of human resources in gaining competitive advantage.Human Resource Management, 37, 1, 31.
Boon, C et al., (2017). Integrating strategic human capital and strategic human resource management.The International Journal of Human Resource Management.
Huselid, M.A. (1995). The impact of human resource management practices on turnover, productivity, and corporate financial performance.Academy of Management Journal, 38, 3, 635-72.
Jiang, K., Lepak, D.P., Hu, J., & Baer, J. C. How does human resource management influence organizational outcomes? A meta-analytic investigation of mediating mechanisms.Academy of Management Journal, 55, 6, 1264-1294.
Lengnick-Hall, M. L., Lengnick-Hall, C. A., Andrade, L. S., and Drake, B. (2009). Strategic human resource management: The evolution of the field. Human Resource Management Review, 19, 2, 64-85.
Lepak, D. P., Liao, H., Chung, Y., & Harden, E. E. (2006). A conceptual review of human resource management systems in strategic human resource management research.Research in Personnel and Human Resources Management, 25, 217–271.
Wright, P. M. & McMahan, G. C. (1992). Theoretical perspectives for human resource management.Journal of Management, 18: 295-320.
Annette was born in England and now lives in the United States. She has a PhD in Industrial and Organizational Psychology and has taught at several institutions. Annette has published in several journals, including Journal of Applied Psychology, Personnel Psychology, Human Resource Development Quarterly, and Organizational Research Methods. She worked in the public and private sector for many years, primarily as a management trainer.