Samenvatting Introduction to Strategic HRM
Chapter 2: Investing in People and Business Performance
Human resources are the pool of human capital that have a direct employment relationship with
the organization and are under the control of this organization. A efficient way to achieve larger
returns on labor costs would be to invest in a more productive workforce. However, since a service
is delivered through the interaction between employees and clients, efficiency alone will not be
enough. Service quality also depends on the quality of the interaction. The added value of these
employees is less dependent on efficiency or on relationships with clients, and more on the
effectiveness through which they can disseminate their knowledge and consequently advance the
organization, its strategy, and innovations. Employees should be viewed as a resource to gain
competitive advantage for organizations. No wonder the main question of strategic human
resource management concentrates on the alignment between investing in people and business
performance.
Two theories dominate the literature on HRM strategy and business performance: the resource-
based view and the social exchange theory. Hence, along with the view that people can make a
difference because of their valuable productivity, knowledge and their network of relations, human
resource management theory is needed that explains why people are willing to use their talents to
benefit the organization. The most-cited theory used to understand why people put in effort at
work is the social exchange theory: why people are willing to unleash their human and social capital
to benefit the organization. All theories are from an economic perspective on human behavior. The
one exception is the theory on individual differences, which originates from psychology.
Scanning the characteristics of the environment will reveal opportunities (e.g., new markets,
innovations), but will also provide insights into potential threats (e.g., competition, changes in
demands). A good strategy would strike the optimal balance between on the one side profiting
from an organization’s strengths and opportunities in the environment, while on the other side
simultaneously managing weaknesses and guarding against threats. The key critique on the SWOT
approach is that when all organizations follow opportunities in the market, it could lead to many
organizations pursuing the same strategy. In practice however, there are many differences between
organizations in how they pursue market opportunities.
Thus, at the center of organizational strengths are organizational resources. Resources are
indispensable features that are available for organizations to create and realize strategies and to
increase efficiency and effectiveness.
It helps to categorize resources into 3 categories:
First, physical capital contains tangible assets like financial resources, property such as land and
buildings, and technological resources. These receive the largest attention by accountants and other
financial specialists, who take their value into account to calculate balance sheets. Hence, physical
capital concerns all tangible resources which are easy to track and if necessary, can be replaced.
,Second, organizational capital represents intangible resources such as policies, procedures, style,
values, traditions, and leadership style. Together, these make up a system of routines whereby
routines display regular and predictable patterns of activities made up of a system of coordinated
actions. Therefore, routines explain to some extent how work is done by employees in an
organization. Organizational capital can be even further divided into structural organizational
capital, the culture, routines, and processes that have been developed in an organization such as the
IT system, the network, management processes and general strategies; and social organizational
capital, which refers to all the internal and external relationships an organization has with
employees, teams, customers, suppliers, the community, and the government.
Finally, human capital concerns the sum of all knowledge, skills, ideas, abilities, and health available
in the people working within an organization. At the individual level, these characteristics are assets
that employees can use to obtain income and wealth. At the aggregated (group) level, human
capital equates the human resources, the shared knowledge, education, and motivation which is an
asset to realize organizational targets.
To really deliver their return on investment, a resource must be a valuable resource. An organization
that is the first to own new technology has a valuable resource in hand and may outperform
competition as long as competitors do not install the new technology as well. Unique sets of
resources that are hard to duplicate by others lead to sustainable competitive advantage.
First, valuable resources are sustainable, meaning that the organization can rely on their availability
over a longer period. Second, valuable resources are rare, thus not easy to obtain. For example, an
excellent location for a new restaurant in the city center is rare and difficult to obtain and can be a
real valuable resource for competitive advantage. Third, transparency matters. The less transparent
it is to others how a set of resources leads to competitive advantage, the more difficult it is for
competitors to follow that exact same strategy and the more valuable a resource is. Secret recipes for
cola are examples of non-transparent and therefore valuable resources. Finally, difficulties of
transferability contribute to how valuable a resource is.
It is, however, possible to get an impression of the value of intangible capital, for example by
looking at the so-called ‘stock price to book value’. This estimate calculates the ratio between the
book value of the organization (from the organization’s yearly financial report) and compares that
to the market value of the organization (from the stock market). If the stock market value largely
exceeds the book value, this indicates that the organization has a large share of intangible capital.
, Human capital theories
The unique aspect about people compared to buildings, machines and systems is that organizations
do not own people. Human capital theories are grounded in two research disciplines: in economics
(Gary Becker, Human capital theory), and in psychology (Spearman, Individual differences, and
performance theories).
Economic theory: Human capital (Becker). They regarded education as an investment that
renders good returns for people because educated people get better jobs and earn more than non-
educated people (Becker, 1964). Moreover, the relation- ship between education and returns is
linear: the higher the level of education, the better the prospects for a good job and a nice salary.
Human capital is all the knowledge, skills, and abilities (KSAs) in an organization that are
embodied in people.
The central tenet of human capital theory at the individual and group level is threefold:
1. Human capital can be rare. Since not all people equally possess the same knowledge, skills
and education, human capital is not easily accessible.
2. Human capital develops overtime by training, education, and experience. To be a sustainable
resource, it needs nurturing and investments.
3. Human capital can be general or firm specific. General human capital means all knowledge
and skills obtained in general education, or by working in an industry. Firm-specific human
capital, in contrast, develops while working and being trained in a specific organization.
Firm-specific human capital leads to even larger returns than general human capital.
Psychological theory: Individual differences (Spearman)
The big question in the individual differences approach is which individual characteristics are
stable and predict differences in individual performance of employees. For selection purposes, it
makes sense to focus on those abilities that are measurable, stable and that cause real differences in
performance. Spearman supposed that there is a latent underlying ability, which he called ‘g’, or
‘general mental ability’, that accounts for differences in performance between people over a variety
of tasks.
Comparing all kinds of performance domains, the following abilities stand out:
1. Intelligence is a latent ability that appears when people perform tasks in which active
information processing is involved. It is the speed with which people process, retrieve, and
combine information. The general level of intelligence predicts how well people perform all
kinds of different tasks.
2. Personality is the second domain of characteristics that qualifies for finding meaningful
differences between people that matter for performance. Personality encompasses a
relatively consistent style that people show in the way they think, act and feel as they
respond to their environment. The Five Factor Model of personality: Open- ness to new
experiences (versus conventional), Conscientiousness (versus un-directedness),
Extroversion (versus introversion), Agreeableness (versus antagonism), and Neuroticism
(versus emotional stability).
3. Conscientiousness is the preference to work hard, to work neatly and to complete all tasks.
This trait does not correlate with intelligence, and it correlates positively with performance.
