Rare and Inimitable: Creating Human Capital Advantage

Companies should focus on their internal talent to create real strategic advantage over competitors. But to do that, they need to create a sophisticated comparison and evaluation system that drives decision making.</em></p> <p>It is no secret that businesses are under increasing pressure to find, leverage and sustain competitive advantages. Traditionally, strategic competitive advantages had been built on external economic factors, such as barriers to entry, scale efficiencies and sophisticated product and marketing differentiations. </p> <p>The transition from a manufacturing-based economy to a service- and information-based economy has weakened many external advantages. Strategic planners now have increased incentives to develop internal resources, particularly human resources, as the basis for true competitive advantages. Economist Edith Penrose predicted this movement in her seminal book The Theory of the Growth of the Firm.</p> <p>Human capital &mdash; talent &mdash; is the only company resource that supplies the organization with the ability to create ideas, relationships, knowledge and models. Every other financial, physical and cultural resource depends on the active mental, social and psychological talent necessary to fulfill it. Organizations should create a systematic and flexible model that links human capital and knowledge to strategic planning and goal setting. Ideally, such a model would be present in an easily adaptable process that integrates selected talent through a planned process that guides the recruitment, selection, reinforcement, application, measurement and implementation of teams designed to achieve specific strategic goals. </p> <p>In this fashion, a results-based comparison and evaluation can take place between the achievement levels of the same or similar strategic goals that occur in normal operational processes.</p> <p><strong>Developing a Decision-Science Perspective</strong></p> <p>In their book Investing in People: Financial Impact of Human Resource Initiatives, Wayne Cascio of the University of Colorado, Denver, and John Boudreau of the University of Southern California encapsulate the idea of &ldquo;talentship.&rdquo; In this model, HR managers are encouraged to learn and develop a decision-science perspective of their organizational function that goes beyond the traditional roles of compliance and administration. In doing so, HR adds value to the organization by using analytical measures that relate talent applications to financial outcomes.</p> <p>In his book, <em>The ROI of Human Capital: Measuring the Economic Value of Employee Performance</em>, Jac Fitz-enz noted that quantitative financial measures alone provide information only on what happened (e.g., time, cost, capacity and revenues). Without quantitative measures of human capital and learning, the organization has no real explanation of how or why its human capital explains financial outcomes. </p> <p>Yet many firms do not have an integrated approach incorporating human capital and knowledge management into strategic planning and business objectives. While firms have unique HR and learning systems, five problems often occur:</p> <p>1. The recruiting and selection of human talent starts and stalls as a &ldquo;stock&rdquo; concept. </p> <p>2. Talented people will seek employment that allows greater self-development and growth. </p> <p>3. Talented people often expect incentives, including health care benefits, retirement plans and tuition assistance, among others.</p> <p>4. Functional walls of separation prevent cross-departmental collaboration on higher goals. </p> <p>5. Top executives envision that talentship and knowledge can be integrated into strategic planning in a fashion that supports marketing and finance goals. </p> <p>While it is important to create a stock of human talent and knowledge, its accumulation alone does not create value. First, employees with valuable knowledge may not share their expertise with management or the C-suite because, more than likely, they operate under the assumption that they&rsquo;re doing their jobs well. Second, it is only through an active flow of human capital and knowledge sharing that employees can demonstrate their tacit and non-documented knowledge unique to the organization. Last, if employees are not challenged to apply stored but unused talent and tacit knowledge, their skills will deteriorate or become obsolete. Like muscle tissue, talent, knowledge, skills and abilities require exercise for vitality and strength.</p> <p>Talented employees who were recruited specifically for their education or certification will likely become demoralized because they are unable to use these unique attributes and talents to create meaningful work and relationships. People make rational economic investments in themselves with the expectation they are making an investment in personal growth and professional benefit.</p> <p>Creating an organizational model designed to invest in valuable human capital and knowledge-sharing applications requires incentives such as benefit packages, compensation options, work arrangement concessions and job-discretion latitude. Understanding that talented employees will actively engage in challenging work, managers may have to plan additional incentives for them while taking into consideration employee risks, opportunity costs, separation conditions and hazard factors of these additional incentives. The idea is to create attractive HR benefits and packages that can be coupled with proactive leadership, both of which will motivate talented employees and keep them focused on results.</p> <p><strong>Account for External Changes and Internal Talent</strong></p> <p>Additional measures need to be taken to proactively respond to external changes that affect the industry and influence organizational strategy. Beyond normal challenges such as economic fluctuations and changes in consumer confidence, businesses today are more sensitive to extraordinary events such as unexpected failures, divestments, competitor liquidations, sweeping national legislation, national security breaches and terrorist attacks, all of which must be analyzed to determine the potential impact on strategic planning processes. Internal changes can also affect the flow of human capital and knowledge. Key talent may be lost through voluntary turnover, and changing policy decisions may impact talent needed for competitive advantage. </p> <p>At service- and information-based businesses, particularly characterized by intense competition, HR managers and learning professionals now have critical roles in developing and coordinating human capital and talent flow within the company. Knowing top leaders want to create human capital strategic advantages, they need a system to select and train employees while reinforcing their talents. The system links specific human capital applications to strategic goals with the ability to make comparative measures. </p> <p><strong>The LAMP Model and Its Challenges</strong></p> <p>Cascio and Boudreau argue that four components are necessary to maximize human capital, each of which is unique to every organization.</p> <p>1. <strong>Logic: </strong>All management must commit to understanding that human resource activities are vital to strategy. </p> <p>2. <strong>Analytics: </strong>Management needs to determine the questions, data and measures that will show human capital impacts on strategic business outcomes.</p> <p>3. <strong>Measures: </strong>Management needs to create specific quantitative and qualitative measurements of human capital investments on strategic business outcomes.</p> <p>4. <strong>Processes: </strong>Managers need to create and sustain leadership and cultural models that support vital human capital knowledge creation and integrate it into a structured repository similar to marketing and financial information systems.</p> <p>The LAMP model assumes a continuous process perspective and rests on the premise that the correct use and deployment of human capital can be used to create opportunities for true competitive advantage.</p> <p>The LAMP model provides a generic yet dynamic approach to aligning human capital talent and knowledge to strategic business objectives. Firms using this approach should give special attention to the challenges, which may require considerable changes in management collaboration and decision making. </p> <p>First, HR generalists and specialists need to master the firm&rsquo;s business model, including the language, logic, and metrics of finance, accounting, marketing and operations, as well the empirical research methods that allow human capital measures to be transparent in accounting and finance terms or readily convertible to them. Current HR methods of efficiency measurement, assessment and tracking should remain in place to the degree that they provide important process support information for traditional HR decisions in compliance, efficiency and effectiveness. </p> <p>Another parallel challenge is a cultural and conceptual shift in an organization&rsquo;s managerial beliefs about the linkage of human capital talent to strategic outcomes. This means operational, financial, accounting and marketing managers may need to learn the paradigm of human capital investment beyond the acknowledgement that human talent permeates all processes and is considered only a support asset. Similar to their HR managerial colleagues, their task is to learn and assimilate the firm&rsquo;s human capital metrics into their planning, budgeting and evaluation so their talent investments can make a significant difference in their departments. </p> <p>Top management may need to revisit policies and internal planning processes in order to create an inclusive and results-based strategy management system that integrates all employee levels in mutually interdependent cross-functional teams. This may require changes in budgeting and organizational design principles.</p> <p>These prescriptive steps may appear challenging or unrealistic because they likely require some fundamental analysis of current management assumptions and measurement practices. However, the LAMP model provides a legitimate and verifiable method to correctly discriminate process and assessment information from outcomes information regarding human capital. Using a decision-science approach with designed talentship measures will eventually provide a more accurate picture of the company&rsquo;s true human capital competitive advantages. </p> <p><strong>Utilize Rare, Inimitable and Non-Substitutable Resources</strong></p> <p>The essence of strategic competitive advantage is the belief that the company should discern and create a method of applying resources that create more value for the customer, allowing the company to benefit with increased revenues or lower costs relative to competitors. The key is to utilize resources that are rare, inimitable and non-substitutable because these attributes reduce the competitor&rsquo;s ability to respond with equal or better value. Each company has unique human capital talent and knowledge resources that can be made into the company&rsquo;s greatest source of strategic advantage. </p>