SHRM for Competitive Advantage
The resource-based view of the firm (RBV) represents a paradigm shift in SHRM thinking by focusing on the internal resources of the organisation, rather than analyzing performance in terms of the external context. Advocates of the resource-based view of SHRM help us to understand the conditions under which human resources become a scarce, valuable, organisation-specific, difficult-to-imitate resource, in other words key ‘strategic assets’ (Barney and Wright, 1998; Mueller, 1998; Amit and Shoemaker, 1993; Winter, 1987).
Proponents of the resource-based view of the firm (Penrose, 1959; Wernerfelt, 1984; Amit and Shoemaker, 1993) argue that it is the range and manipulation of an organisation’s resources, including human resources, that give an organization its ‘uniqueness’ and source of sustainable competitive advantage. Their work has resulted in an ‘explosion of interest in the Resource-Based perspective’ (Boxall and Purcell, 2003: 72), particularly in seeking ways to build and develop ‘unique bundles’ of human and technical resources that will lead to enhanced organisational performance and sustainable competitive advantage.
Barney (1991, 1995) and Barney and Wright (1998) contribute to the debate on strategic HRM in two important ways. Firstly, by adopting a resource-based view (Barney, 1991; Wernerfelt, 1984), they provide an economic foundation for examining the role of human resource management in gaining sustainable competitive advantage. Secondly, in providing a tool of analysis in the VRIO framework, and by considering the implications for operationalising human resource strategy, they emphasise the role of the HR executive as a strategic partner in developing and sustaining an organisation’s competitive advantage.
The resource-based view therefore recognises the HR function (department) as a key ‘strategic’ player in developing sustainable competitive advantage and an organisation’s human resources (employees) as key assets in developing and maintaining sustainable competitive advantage.
The VRIO framework
The resource-based view of SHRM explores the ways in which an organisation’s human resources can provide sustainable competitive advantage. This is best explained by the VRIO framework:
Organisations need to consider how the human resources function can create value; it is quite common in organisations to reduce costs through HR such as the reduction in headcount and the introduction of flexible working practices etc., but it is also important to consider how they might increase revenue. Reicheld (1996) has identified human resources’ contribution to the business as efficiency, but also as customer selection, customer retention and customer referral, thus highlighting the impact of HR’s contribution through enhanced customer service and customer added value.
This view is reflected by Thompson (2001), in recognising the paradigm shift from traditional added value through economy and efficiency to ensuring that the potential value of outputs is maximized by ensuring that they fully meet the needs of the customers for whom the product or service is intended. The suggestion of the resource-based view is that if Human Resources wishes to be a ‘strategic partner’, they need to know which human resources contribute the most to sustainable competitive advantage in the business, as some human resources may provide greater leverage for competitive advantage than others.
Hamel and Prahalad (1993) therefore identify that productivity and performance can be improved by gaining the same output from fewer resources (rightsizing) and by achieving more output from given resources (leveraging). In order to achieve this, Human Resources may ask themselves the following questions:
- On what basis is the firm seeking to distinguish itself from its competitors? Production efficiency? Innovation? Customer service?
- Where in the value chain is the greatest leverage for achieving differentiation?
- Which employees provide the greatest potential to differentiate a firm from its competitors?
This approach has further implications for the role of human resource managers in a firm, as they need to understand the economic consequences of human resource practices and understand where they fit in the value chain. Barney and Wright (1998: 42) suggest that the Human Resources function needs to be able to explore the following questions:
- Who are your internal customers and how well do you know their part of the business?
- Are there organisational 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 these services reduce internal customers’ costs/increase their revenues?
- Can these services be provided more efficiently by outside vendors?
- Can you provide these services more efficiently?
- Do managers in the HR function understand the economic consequence of their jobs?
The value of an organisation’s resources is not sufficient alone, however, for sustainable competitive advantage, because if other organisations possess the same value, then it will only provide competitive parity. Therefore an organisation needs to consider the next stage of the framework: rarity.
The HR Executive needs to consider how to develop and exploit rare characteristics of a firm’s human resources to gain competitive advantage. Nordstrom is an interesting case, because it operates in a highly competitive retail industry where you would usually expect a lower level of skill and subsequently high labour turnover. Nordstrom, however, focused on individual salespeople as a key source of its competitive advantage. It therefore invested in attracting and retaining young collegeeducated people who desired a career in retailing.
To ensure horizontal integration, it also provided a highly incentive-based compensation system (up to twice the industry average), and it encouraged employees to make a ‘heroic effort’ to attend to customers’ needs. Thus, by investing in its human resources, and ensuring an integrated approach to development and reward, Nordstrom has taken a ‘relatively homogeneous labour pool, and exploited the rare characteristics to gain a competitive advantage’ (Barney and Wright, 1998: 34).
If an organisation’s human resources add value and are rare, they can provide competitive advantage in the short term, but if other firms can imitate these characteristics, then over time competitive advantage may be lost and replaced with competitive parity. The third element of the VRIO framework requires Human Resources to develop and nurture characteristics that cannot be easily imitated by the organisation’s competitors. Barney and Wright (1998) recognise the significance of ‘socially complex phenomena’ here, such as an organisation’s unique history and culture, which can be used to identify nique practices and behaviours which enable organisations to ‘leapfrog’ their competitors.
Alchian and Demsetz (1972) also identified the contribution of social complexity in providing competitive advantage, in their work on the potential synergy that results from effective teamwork. They found that this ensured a rare and difficult-to-copy commodity for two reasons: firstly, it provided competitive advantage through its causal ambiguity, as the specific source of the competitive advantage was difficult to identify; secondly, through its social complexity, as synergy resulted as team members were involved in socially complex relationships that are not transferable across organisations. So characteristics such as trust and good relationships become firm-specific assets that provide value, are rare and are difficult for competitors to copy.
The extract above (Box 2.3) demonstrates the strength of inimitability: SW Airlines exemplifies the role that socially complex phenomena, such as culture, can play in gaining competitive advantage. Top management attribute the company’s success to its ‘personality’, a culture of ‘fun’ and ‘trust’, that empowers employees to do what it takes to meet the customers’ needs. This is reinforced through an extensive selection process, and a culture of trust and empowerment reinforced by the CEO. SW Airlines attributes its strong financial success to its ‘personality’, which CEO Kelleher believes cannot be imitated by its competitors. So the human resources of SW Airlines serve as a source of sustainable competitive advantage, because they create value, are rare and are virtually impossible to imitate.
Finally, to ensure that the HR function can provide sustainable competitive advantage, the VRIO framework suggests that organisations need to ensure that they are organized so that they can capitalise on the above, adding value, rarity and inimitability. This implies a focus on horizontal integration, or integrated, coherent systems of HR practices rather than individual practices, that enable employees to reach their potential (Guest, 1987; Gratton et al., 1999; Wright and Snell, 1991; Wright et al., 1996).
This requires organisations to ensure that their policies and practices in the HR functional areas are coordinated and coherent, and not contradictory. Adopting such a macro-view, however, is relatively new to the field of SHRM, as ‘each of the various HRM functions have evolved in isolation, with little coordination across the disciplines’ (Wright and McMahan, 1992). Thus there is much best-practice literature focusing on the microperspective, for example on identifying appropriate training systems, or conducting performance appraisals, or designing selection systems.
Although this literature has now evolved and recognised the ‘strategic’ nature of the functional areas, it has tended to focus on vertical integration at the expense of horizontal integration, thus there is still limited development in the interplay between employee resourcing, employee development, performance, reward and employee relations strategies. This discussion is explored in more detail in the next section: best-practice SHRM.
So, to conclude on the VRIO framework, if there are aspects of human resources that do not provide value, they can only be a source of competitive disadvantage and should be discarded; aspects of the organisation’s human resources that provide value and are rare provide competitive parity only; aspects that provide value, are rare but are easily copied provide temporary competitive advantage, but in time are likely to be imitated and then only provide parity.
So to achieve competitive advantage that is sustainable over time, the HR function needs to ensure the organisation’s human resources provide value, are rare, are difficult to copy and that there are appropriate HR systems and practices in place to capitalise on this. Mueller (1998), in advocating the resource-based view of SHRM, argues that ‘the existing theorising in strategic HRM needs to be complemented by an evolutionary perspective on the creation of human resource competencies’.
He echoes Mintzberg’s concerns (1987) that an overly-rationalistic approach to strategy-making tends to focus too much attention on past successes and failures, when what is really needed is a level of strategic thinking that is radically different from the past. He identifies a lack of theoretical and empirical evidence to justify the emphasis on rational, codified policies of HRM, and reflects Bamberger and Phillips (1991) in describing human resource strategy as an ‘emergent pattern in a stream of human-resource related decisions occurring over time’.
Thus the strategic planning approach may be viewed by some as a ‘metaphor employed by senior management to “legitimise emergent decisions and actions”’ (Gioia and Chittipeddi, 1991). Unlike contingency and universalist theorists (Schuler and Jackson, 1987; Miles and Snow, 1978; Kochan and Barocci, 1985; Pfeffer, 1994, 1998; Huselid, 1995), Mueller is more wary of the claimed relationship between strategic HRM and the overall financial performance of an organisation. He recognises that enlightened best-practice HR activities do not automatically translate into competitive superiority but rather require more complex and subtle conditions for human resources to become ‘strategic assets’.
He defines these as ‘the social architecture’ or ‘social patterns’ within an organisation which build up incrementally over time and are therefore difficult to copy. The focus on ‘social architecture’ rather than culture is deliberate as it provides an emphasis on developing and changing behaviours rather than values, which are notoriously difficult to change (Ogbonna, 1992). Mueller identifies an organisation’s ‘social architecture’ as a key element in the resource-based view of SHRM, together with an embedded ‘persistent strategic intent’ on the part of senior management and embedded learning in daily work routines, which enable the development of ‘hidden reservoirs’ of skills and knowledge, which in turn can be exploited by the organisation as ‘strategic assets’. The role of Human Resources is then to channel these behaviours and skills so that the organisation can tap into these hidden reservoirs. This thinking is reflected in the work of Hamel and Prahalad (1993, 1994), discussed below.
Applying the Resource-Based view of SHRM
In adopting a focus on the internal context of the business, HR issues and practices are core to providing sustainable competitive advantage, as they focus on how organizations can define and build core competencies or capabilities which are superior to those of their competitors. One key framework here is the work of Hamel and Prahalad (1993, 1994) and their notion of ‘core competencies’ in their ‘new strategy paradigm’. They argue that ‘for most companies, the emphasis on competing in the present, means that too much management energy is devoted to preserving the past and not enough to creating the future’.
Thus it is organisations that focus on identifying and developing their core competencies that are more likely to be able to stay ahead of their competitors. The key point here is not to anticipate the future, but create it, by not only focusing on organisational transformation and competing for market share, but also regenerating strategies and competing for opportunity share. Thus in creating the future, strategy is not only seen as learning, positioning and planning but also forgetting, foresight and strategic architecture, where strategy goes beyond achieving ‘fit’ and resource allocation to achieving ‘stretch’ and resource ‘leverage’.
The level of both tacit and explicit knowledge within the firm, coupled with the ability of employees to learn, becomes crucial. Indeed, Boxall and Purcell (2003) argue that there is little point in making a distinction between the resource-based view and the knowledge-based view of the firm, as both approaches advocate that it is a firm’s ability to learn faster than its competitors that leads to sustainable competitive advantage.Alternatively, Boxall and Purcell present Leonard’s (1998) similar analysis based on ‘capabilities’.
These are ‘knowledge sets’ consisting of four dimensions: employee skills and knowledge, technical systems, managerial systems, and values and norms. In this model, employee development and incentive systems become a key driving force in achieving sustainable competitive advantage through core capability. Interestingly, Leonard emphasises the interlocking, systemic nature of these dimensions and warns organisations of the need to build in opportunities for renewal, to avoid stagnation.
Hamel and Prahalad’s notion of ‘core competency’
When organisations grow through mergers or acquisitions, as they appear increasingly to do (Hubbard, 1999), it has been argued that the resource-based view takes on further significance. When mergers and acquisitions fail, it is often not at the planning stage but at the implementation stage (Hunt et al., 1987) and people and employee issues have been noted as the cause of one-third of such failures in one survey (Marks and Mirvis, 1982). Thus ‘human factors’ have been identified as crucial to successful mergers and acquisitions.
The work of Hamel and Prahalad (1994) indicated that CEOs and directors of multidivisional firms should be encouraged to identify clusters of ‘know-how’ in their organisations which ‘transcend the artificial divisions of Strategic Business Units’ or at least have the potential to do so. Thus the role of Human Resources shifts to a ‘strategic’ focus on ‘managing capability’ and ‘know-how’, and ensuring that organisations retain both tacit and explicit knowledge (Nonaka and Takeuchi, 1995) in order to become more innovative, as organisations move to knowledge- based strategies as opposed to product-based ones.
The resource-based view of SHRM has recognised that both human capital and organizational processes can add value to an organisation; however, they are likely to be more powerful when they mutually reinforce and support one another. The role of Human Resources in ensuring that exceptional value is achieved and in assisting organisations to build competitive advantage lies in their ability to implement an integrated and mutually reinforcing HR system which ensures that talent, once recruited, is developed, rewarded and managed in order to reach their full potential.
This theme of horizontal integration or achieving congruence between HR policies and practices is developed further in the next section, best-practice approach to SHRM.
Limitations of the Resource-Based view
The resource-based view is not without its critics, however, particularly in relation to its strong focus on the internal context of the business. Some writers have suggested that the effectiveness of the resource-based view approach is inextricably linked to the external context of the firm (Miller and Shamsie, 1996; Porter, 1991). They have recognized that the resource-based view approach provides more added value when the external environment is less predictable.
Other writers have noted the tendency for advocates of the resource-based view to focus on differences between firms in the same sector, as sources of sustainable competitive advantage. This sometimes ignores the value and significance of common ‘base-line’ or ‘table stake’ (Hamel and Prahalad, 1994) characteristics across industries, which account for their legitimacy in that particular industry. Thus in the retail sector, there are strong similarities in how the industry employs a mix of core and peripheral labour, with the periphery tending to be made up of relatively low-skilled employees, who traditionally demonstrate higher rates of employee turnover.
Thus in reality, economic performance and efficiency tend to be delivered through rightsizing, by gaining the same output from fewer and cheaper resources, rather than through leverage, by achieving more output from given resources. The example of B&Q in the UK, employing more mature people as both their core and particularly their peripheral workforce, is a good example of how an organisation can partially differentiate themselves from their competitors, by focusing on adding value through the knowledge and skills of their human resources.