FormalPara Definition

Human resources are endowed with certain attributes, often termed human capital or KSAOs (that is, knowledge, skills, abilities, and other characteristics such as personality). Human resource management (HRM) concerns the organizational structures, policies and practices that influence organizational effectiveness through the management of people and their attributes. The aim of HRM is to provide business value. The combination of human resources and HRM is theorized to be at the core of firm performance and sustained competitive firm advantage.

Organizations depend on people’s motivations to participate and to produce (March and Simon 1958). From a strategic perspective people are seen as human resources (or assets) which self-select and are selected into firms. Building upon Becker’s (1962) seminal work, strategists assume that human resources are heterogeneous and endowed with different types and degrees of human capital. Human capital captures stocks of education, information and health that have been accumulated both on and off the job (Becker 1962). Given that human resources are not randomly distributed across firms, the optimal matching of firms, workers and jobs is crucial in achieving a competitive advantage.

‘Matching firms with workers would be an easy process if labor were a commodity like some other inputs. However, labor is probably the most heterogeneous of all inputs in production functions’ (Lazear and Oyer 2013: 492). Because human resources are different, value creation through human resources also follows specific mechanisms. As Coff (1997: 375) mentions, ‘firms cannot achieve a sustainable advantage from human assets unless they are able to cope with the associated management dilemmas. The most obvious problem is that the firm’s assets walk out the door each day, leaving some question about whether they will return.’ Becker (1962: 19) explained that ‘Turnover becomes important when costs are imposed on workers or firms, which are precisely the effects of specific training.’ In his classical model workers invest in general human capital, which has equal value in many firms and is traded in competitive markets. Because workers can realize the same rent in many firms, firms have no incentive to invest in this type of human capital. To the contrary, workers who acquire firm-specific human capital have no incentive to leave the firm because they will be less productive in other firms. Because both firms and workers have ex post benefits from specific training but no incentive to invest ex ante, firms and workers typically share both the investment and the rent, which means that some negotiating over investments and rents occurs (Lazear 2009).

Specificity is often viewed as a necessary condition for a competitive advantage (Amit and Schoemaker 1993). That is, in order to create above-average returns from human resources, joint specific investments are required. The result of such investments is a bilateral monopoly situation where the worker can realize monopoly rents from specific knowledge and where the firm has a monopsony position because no other firm will demand the firm-specific human capital at the same price. Recently, though, the notion of firm-specific human capital has been challenged. Some authors have stressed that individuals possess portfolios of both general and specific human capital, and that the portfolio and its use by the firm determine its value (Campbell et al. 2012). Others have argued that human capital is never specific in the sense that no other firm can use it. Lazear (2009) has suggested that all human capital, is general. In this model, firms differ in their weighting of distinct human capital components. Individuals then invest in human capital components in which they have a comparative advantage; alternatively, they self-select into firms according to the given human capital weighting schemes. Gathmann and Schönberg (2010) have developed the view that human capital may be task-specific rather than firm-specific (see also Gibbons and Waldman 2004), which allows moves across occupations with similar task structures. Yamaguchi (2012) has delivered additional proof and evidence for such claims.

The proposed models assume that industries, occupations, firms or tasks require skills which individuals initially (at the time of labour market or organizational entry) possess; alternatively, they may invest in the skills ex post through learning on the job. The weighting schemes for certain skill uses are exogenously given (e.g., by the production technology). Thus, match quality is determined by: (1) two-sided selection decisions based on initial human capital endowments, and (2) ex post investment and moves on behalf of the worker. Specificity, in turn, occurs when selection or investments allow bilateral monopoly rents. This model setup is helpful in explaining mobility across firms and within occupations but leaves only little room for strategic HRM. This, in turn, is at odds with the insight that ‘Matching the right firms to the right workers (as well as matching workers to the most appropriate jobs within the firms) creates economic value of a magnitude that few other economic processes can’ (Lazear and Oyer 2013: 492). The internal labour markets view (Waldman 2013) provides an extension that may be useful for strategy scholars.

Human Resource Management

Human resource management (HRM) relates to the organizational structures, policies and practices that influence employee behaviour. Its goal is to provide business value through people management. Research in HRM is often distinguished into micro-, international and strategic approaches (Lengnick-Hall et al. 2009). Micro-HRM is concerned with individual-level issues such as the decisions to participate and to produce (March and Simon 1958). International HRM deals with people management in a cross-country environment. Weller and Gerhart (2012) consider the following questions: How much do countries differ in their use of HRM practices? To what degree do HRM practices fit certain countries and show a misfit in others, as evidenced by effectiveness outcomes? Are the relationships stable or do they change over time?

Strategic HRM centres on the value creation potential of people management. From a universalistic perspective, a general set of HRM practices, often termed ‘High Performance Work Practices’ (Huselid 1995; Becker and Gerhart 1996), is assumed, which each individually contribute to firm performance. The argument is that some HRM practices will enhance the performance of a firm, no matter under what conditions (competition, factor markets etc.) it operates. The contingency perspective takes a similar stance but assumes that HRM practices need to be aligned with the overall business strategy and the environment of the firm (external or vertical fit). The configurational approach argues that in addition to external fit, internal (or horizontal) fit also needs to be achieved. In this perspective, HRM practices need to be aligned to business and HRM strategies (external fit) and to be combined in ‘bundles’ (internal fit; Delery and Doty 1996). Coherent bundles of HRM practices raise and leverage synergies (e.g., internal career ladders combined with seniority wages). At the same time they have configurational properties (e.g., causal ambiguity; see below), which are difficult for competitors to imitate.

In the configurational approach the question of how to achieve a sustained competitive advantage is most prevalent (Barney 1991). It is assumed that under certain conditions it will be hard for competitors to copy particular human resources and HRM practices. Human resources and HRM are interpreted as socially complex because they operate through and create social structures (e.g., co-worker relations, organizational culture), are causally ambiguous (i.e., have cause-and-effect relations that are difficult to understand) and path-dependent (i.e., are idiosyncratically distributed because of past investments). Such imitation barriers may safeguard a competitive advantage. However, they also pose management dilemmas that need to be solved (Coff 1997).

A simple but powerful approximation of the value creation potential from people management is the product of human capital times HRM. In other words, human capital is made productive through the application of the ‘right’ HRM. Barney and Wright (1998) refer to this when they claim that the HRM department (‘big HR’) and individual agents (‘small hr’) need to be considered in combination. In the same vein the abilities–motivation–opportunities (AMO) framework (Appelbaum et al. 2000) posits that HRM enhances employee abilities (through selection and training), motivation (through incentives) and opportunities to perform (through job design). Individual attributes, then, are assumed to transform to macro-level outcomes, where HRM proximal (e.g., turnover rates, commitment, job satisfaction) and distal factors (e.g., market capitalization, or, more broadly, return on investment) are differentiated (Dyer and Reeves 1995).

Given that the matching of workers with jobs inside the firm has great potential for value creation, surprisingly little research has been conducted in this area. The internal labour markets view (Waldman 2013) appears to offer some promising ideas for future research. If the assumption of homogeneous within-firm labour demand is relaxed, one may think of large firms (which are most often addressed by HRM theorists) as labour markets with distinct tasks, jobs, and occupational and industry settings. This means that matching human capital to tasks, jobs, occupations and industries is a crucial task for HRM. In this view, weighting schemes for human capital components will vary between and within firms, and human capital components may vary across time or be person-fixed (such as ability or personality traits), such that individuals will sometimes find it hard to rationally invest in human capital that is valued by the firm. Specificity and joint value creation therefore depend on worker investments and on horizontal (e.g., job rotation) and vertical (e.g., promotions) matching processes inside the firm.

Methodological Issues

Gerhart (2007) has summarized the empirical challenges of HRM research. Weller and Gerhart (2012) provide an overview for the international context. In both cases, two issues deserve attention: first, because HRM is multi-level, many empirical problems centre on some sort of nested data. Examples include individuals nested in firms nested in industries. The problem is that clustered data are not independent, and thus assumptions of the standard regression model are violated. Violations may result in increased type 1 error rates because the degrees of freedom differ within the data and standard errors may be biased downwards for higher-level variables.

Second, it is difficult to establish the causal link between HRM and firm performance. Since most field data are not randomly drawn from the population (i.e., ‘treatments’ like HRM practices are not randomly assigned), the HRM–performance relationship is subject to endogeneity concerns. Endogeneity may stem from various sources such as omitted variables, simultaneity or non-random measurement error. For example, Gerhart and colleagues (2000) reasoned that measurement error caused by low single-informant reliability would seriously bias the relationship between HRM and performance outcomes. In a general sense, one promising avenue is the ‘insider econometrics’ approach (e.g., Ichniowski et al. 1997; Ichniowski and Shaw 2013). Here, time series data from several units of the same firm with sufficient variation in HRM practices over time are used. The approach avoids many of the problems of cross-sectional, single-level and multi-industry studies. However, the drawback is that results cannot be easily generalized. However, the approach is promising and should therefore be an important subject of future research.

See Also