SHRM articles summary
Article 1: Rethinking sustained competitive advantage from human capital (Campbell et al., 2012)
Strategy literature emphasises that human capital can be a source of competitive advantage if
workers are prevented from taking their valuable knowledge and skills to rival firms.
- Most important isolating mechanism is firm-specific human capital = knowledge and skills
embodied in individuals that cannot be easily applied in other firms.
Limits individual’s mobility whereas general human capital does not.
Thus, firm-specific human capital is assumed to support competitive advantage, whereas
general human capital is assumed not to.
The article clarifies 3 key unstated boundary conditions that limit the usefulness of extant theories
connecting human capital and competitive advantage.
- Then, after articulating the boundary conditions, the second contribution is developing a
more comprehensive framework predicting when human capital may lead to sustained
advantages.
The authors focus on the interaction of both demand- and supply-side constraints on worker
mobility, where demand-side constraints effect labour market demand for workers, and supply-side
constraints influence workers’ willingness to supply their labour externally.
- Different from previous research that only has focused on demand-side factors.
HOW FIRM-SPECIFIC HUMAN CAPITAL FUNCTIONS AS AN ISOLATING MECHANISM
Competitive advantage = a firm is able to create more economic value that the marginal (breakeven)
competitor.
- Firms are positioned to sustain such an advantage when isolating mechanisms hinder rivals
from acquiring key resources (e.g., switching costs, high transaction costs, etc.).
- Firm specificity is one potential isolating mechanism because firm-specific resources cannot
be redeployed in other organisations “without sacrifice of productive value”.
E.g., firms may develop routines that help them address firm-specific challenges that
cannot be easily imitated by competitors without a costly investment.
Firm-specific human capital = worker level knowledge, skills, and abilities that have limited
applicability outside the focal firm.
- E.g., Walmart employees who understand the unique distribution systems cannot easily
apply this knowledge at rival firms since their knowledge is cospecialised to a broad mix of
assets unique to Walmart.
- General human capital = worker skills that are broadly applicable outside the focal firm.
- Human capital can be at the core of a resource-based advantage if it is valuable, rare, and
can be kept from rivals.
However, human capital is not owned, or even fully controlled by the firm so human
capital can only be isolated to the extent that employees have little ability or willingness
to leave the firm (ex post limits to worker mobility).
How can firm-specific human capital constrain worker mobility?
Firm specific skills have limited applicability to other firms, resulting in a large difference between the
use value of workers' firm-specific skills in the focal firm and the use value of these same skills in
alternative firms. The low use value affects the wages that alternative firms are willing to pay for
these skills in the labour market; thus, these skills have low exchange value.
, - Contrarily, general human capital is broadly applicable so it has high value to multiple firms
and, thus, has high exchange value.
According to theory, workers can invest in either firm-specific or general skills, making the mutually
exclusive activities; i.e., firm-specific skills represent foregone investments in general skills.
- By investing in firm specific skills, workers increase their use value to their employers,
without increasing their exchange value in the labour market.
- External employers can offer compensation that reflects the exchange value of workers’
human capital, but the focal firm can offer compensation up to the use value of their human
capital.
- If firm-specific human capital has a higher value at the current employer, a move requires
sacrificing both the compensation for firm-specific skills and the opportunity costs (e.g., of
investments in general human capital they could have made).
From a strategic perspective, firm-specific human capital potentially functions as an isolating
mechanism in two ways:
1. Workers with firm-specific human capital are less likely to leave voluntarily, and, therefore,
they are less likely to take valuable general knowledge and capabilities to rival firms.
2. Even if workers leave voluntarily, the firm-specific human capital they take with them cannot
be perfectly deployed and utilised in rival firms.
These 2 create sustained competitive advantages for firm-specific human capital.
However, it is less clear when firm-specific human capital may fail to support competitive advantage
or when general human capital can generate sustained advantage.
ESTABLISHING BOUNDARY CONDITIONS FOR THE FIRM-SPECIFIC HUMAN CAPITAL STORY
In this section the authors develop three important and largely ignored boundary conditions that
constrain the applicability of the firm-specific human capital story when seeking to explain sustained
competitive advantage.
Heterogeneous value of the portfolio of worker skills
- Whereas labour economists typically treat firms as homogeneous in order to explore labour
markets more broadly, resource-based theorists explicitly assume heterogeneity in firm
resources.
Thus, firms have unique portfolios of resources and capabilities.
- The value of such skills may differ considerably between firms because of different
technologies, product markets, and complementary assets.
So, if a rival firm has more productive complementary assets, a worker’s general skills
may be more highly valued externally than they are by the current employer.
- This may then overshadow any firm-specific skills not valued externally, thereby facilitating
mobility despite the presence of firm-specific skills.
- It is thus critical to analyse the nature of entire portfolios of skills rather than any single skill
in isolation since workers have portfolios of both general and firm-specific skills.
Need to consider labour market demand for all the worker’s skills simultaneously, rather
than any isolated skills individually.
- Risk of losing workers to firms with more productive complementary assets increases as the
relative importance of firm-specific human capital decreases.
E.g., if the service of the employee creates more value at an external company than for
the focal company, the external company may be willing to compensate the employee
more for his or her general skills than that the focal company is willing to compensate for
, both the employee’s general and firm-specific skills; thus the employee’s firm-specific
skills may not bind him/her to the current employer.
Boundary condition 1: A necessary condition for firm-specific human capital to function as an
isolating mechanism is that the exchange value of workers’ general human capital is no
greater than the use value of workers’ full portfolio of human capital in the focal firm (holding
constant supply-side constraints on worker mobility).
Imperfect information and exchange value
- In traditional logic: if skills are imperfectly transferrable or inapplicable at rival firms, then
alternative employers derive low use value from these skills, so these skills then have low
exchange value.
- However, real labour markets are fraught with information problems, making it very difficult
for hiring firms to evaluate the human capital any individual worker possesses.
It is likely that firms will incorrectly value the skill portfolio of potential employees.
If worker skill portfolios are incorrectly valued in the labour market, it is possible that
workers with portfolios of mostly general human capital may face low external demand
while workers with portfolios of mostly firm-specific human capital may experience high
external demand.
- Traditional firm-specific human capital = worker skill portfolio is not applicable elsewhere
and the market correctly values the portfolio.
- Traditional general human capital = worker skill portfolio is valuable and applicable
elsewhere and the market correctly values the portfolio.
, The bottom left and upper right quadrants capture scenarios that are not typically considered in the
traditional human capital story, where the portfolio’s of workers’ skills are incorrectly valued.
Undervalued general human capital: since general human capital is undervalued, workers in this
quadrant are relatively immobile even though their skills are highly transferable.
- This may occur due to 2 reasons:
1. There is incomplete information about the quality and quantity of workers’ knowledge
and skills.
o Lemons problem: since firms don’t know whether potential employees are high- or
low-quality workers, they offer average wages (undervaluing the highly skilled
workers)
2. Even when workers’ skills are observable, firms may be unwilling to pay the full use value
of those skills because of some other stigma attached.
o E.g., due to discrimination in labour markets, the skills or workers are priced too
low because of incorrect collective perceptions.
Overvalued firm-specific human capital can provide a strong signal of valuable underlying general
skills for at least 2 reasons:
1. Valuable general human capital may be necessary before workers can successfully acquire
firm-specific human capital.
2. Valuable general human capital may be codeveloped as workers make highly firm-specific
investments (workers’ investments in firm-specific skills may actually increase their market
value.
- However, firm-specific human capital may not always accurately signal valuable underlying
general human capital.
Incomplete information regarding the employee’s skills in an alternative organisation
(different from the one the employee is currently employed in) drives a wedge between
his/her exchange value and the true use value of his/her skills.
Note that human capital that is systematically undervalued in the labour market may be a source
of sustained competitive advantage because the focal firm can potentially retain workers with
undervalued human capital for less than the use value of their skills.
- Likewise, overvalued firm-specific human capital may actually degrade a firm's
competitiveness for two reasons:
1. Focal firm may have to share more rents with workers to persuade them to stay
2. Workers with firm-specific human capital will have greater outside options, making it
more likely that they will leave and take their valuable knowledge and skills with them.
Boundary condition 2: A necessary condition for film-specific human capital to function as an
isolating mechanism is that the exchange value of worker skills and the firm specificity of
those skills must be tightly coupled (holding constant supply-side constraints on worker
mobility).
Supply-side mobility constraints
A variety of labour market imperfections may constrain employee mobility, independent of the
specificity of their human capital. The authors present 2 important imperfections that can constrain
the mobility of employees with valuable human capital and, thus, facilitate creating and sustaining
human capital-based competitive advantage.
