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Unit 1
HRM & Competitive Advantage
 Contents
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 HRM – Business Outcome Linkages

 HRM Systems and Firm Performance
 HR and Competitive Advantage
 Competitive Advantage: From Past to the Future
 Sustained Competitive Advantage
3 HRM-Business Outcome Linkage
 HRM-Business Outcome Linkage
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 Traditional view of Business-HRM-Outcome Linkage: -

Business Strategy,
Workforce
Technology & Business
HRM Strategy Composition
Other Contextual Outcomes
& Behaviors
Factors
 HRM-Business Outcome Linkage (Contd.)
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 Full Model of Business-HRM-Outcome Linkage: -

Legal & Labor

Environment

Business
Strategy
Organizational Behavioral / HRM
Design/ Work Role Systems
Processes Requirements

Technology

Workforce Workforce Business

Composition Behaviors Outcomes
6 HRM Systems & Firm Performance
 HRM Systems & Firm Performance
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 Organizational Capability
 Traditional way to think about CA → focus on the
company’s financial, strategic and technological
capabilities
 Dave Ulrich & date Lake → Contemporary view →
traditional means must be supplemented by
‘Organizational Capability’ – the firm’s ability to
manage people to gain CA
 High performing companies engage in explicit
competition for the most capable employees
 HRM Systems & Firm Performance (Contd.)
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 Organizational Capability (Contd.)

 OC relates to hiring and retaining competent
employees and developing those competencies
through effective HR practices
 It is OC and not tech/fin capability that is most
difficult to replicate
 HRM Systems & Firm Performance (Contd.)
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 Organizing for Success

 Robert Waterman: -
◼ Top performing companies provide employees with: -
◼ Something to believe in
◼ A feeling of control
◼ Job challenge
◼ Opportunity to engage in lifelong learning
◼ Recognition for achievements
◼ The best firms are better organized to meet the
needs of their people, so that they attract better
people than competitors do and their people are
more greatly motivated to do a superior job,
whatever it is they do
 HRM Systems & Firm Performance (Contd.)
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 Competitive Advantage through Effective

Management of People
 Jeffrey Pfeffer
◼ What distinguishes the most successful firms in our
economy from all the others is that for their
sustained advantage, they rely not on technology,
patents, or strategic position, but on how they
manage their workforce
 HRM Systems & Firm Performance (Contd.)
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 Competitive Advantage through Effective

Management of People (Contd.)
 Jeffrey Pfeffer (Contd.)
◼ Management practices that result in sustained CA
for highly successful firms: -
1. Selectivity in recruting
2. Incentive pay
3. Employee ownership
4. Training and skill development
5. Cross-utilization and cross-training
6. Symbolic egalitarianism
7. Wage compression
 HRM Systems & Firm Performance (Contd.)
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 Management practices that lead to superior

organizational performance: -
 As per Jeffrey Pfeffer: -
1. Employment and security
2. Selective hiring
3. Self-managed teams
4. High compensation contingent to performance
5. Training to provide a skilled and motivated workforce
6. Reduction of status differentials
7. Sharing information
 HRM Systems & Firm Performance (Contd.)
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 Management practices that lead to superior

organizational performance: -
 As per Guest: -
1. Selection and the careful use of selection tests to identify those with
potential to make a contribution
2. Training, and in particular a recognition that training is an ongoing
activity
3. Job design to ensure flexibility, commitment and motivation,
including steps to ensure that employees have the responsibility and
autonomy fully to use their knowledge and skills
4. Communication to ensure that a two-way process keeps everyone
fully informed
5. Employee share ownership programmes to increase employees’
awareness of the implications of their actions on the financial
performance of the firm
14 HR and Competitive Advantage
 HR & Competitive Advantage
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 Jay Barney: -
 Competitive Advantage arises first when firms within an
industry are heterogeneous with respect to the strategic
resources they control and second when these resources
are not perfectly mobile across firms and thus
heterogeneity can be long lasting.
 Creating sustained competitive advantage therefore
depends on the unique resources and capabilities that
a firm brings to competition in its environment. These
resources include experience, knowledge, judgment,
risk taking propensity and wisdom of individuals
associated with a firm
 HR & Competitive Advantage (Contd.)
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 Jay Barney: -
 Attributes required by a firm to create competitive
advantage: -
1. Valuable
2. Rare
3. Imperfectly imitable
4. Non-substitutable
 HR & Competitive Advantage (Contd.)
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 Wright and McMahan

 Competitive advantage through human resources arises
because: -
1. There is heterogeneity in their availability in the sense of the
differences that exist between them across firms in an industry
and
2. They are immobile in the sense that competing firms may be
unable to recruiting them
 HR & Competitive Advantage (Contd.)
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 Wright and McMahan (Contd.)

 Criteria governing resource's ability to provide competitive
advantage: -
1. The resource must add positive value to the firm
2. The resource must be unique or rare amongst current and potential
competitors
3. The resource must be imperfectly imitable
4. The resource cannot be substituted with another resource by
competing firms
 Boxall and Purcell: -
◼ Resource based HRM can produce HR Advantage. The aim is to develop
strategic capability. This means strategic fit between resources and
opportunities, obtaining added value from the effective deployment of
resources, and developing people who can think and plan strategically
in the sense that they understand key strategic issues and ensure that
what they do supports the achievement of the business’s strategic goals
19
Competitive Advantage:
From the Past to the Future
 Competitive Advantage: From the Past to the Future
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 CA entails having the capability to provide better

products, services, or financial returns than the
competition does. HR should help its firm create value
in the marketplaces for said capital, products and
services before its competitors do. As HR creates this
kind of value in a timely manner, it contributes to the
firm’s CA
 Competitive Advantage: From the Past to the Future
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 Operational HR Activities → routine, day-to-day delivery of

HR basics
 Strategic HR Activities → Five criteria: -
1. Long term

2. Comprehensive

3. Planned

4. Integrated

5. High-value added

 Two dimensions of HR Activities: -

1. Reactive

2. Proactive
 Competitive Advantage: From the Past to the Future
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 Dimensions of CA for HR Activities: -

REACTIVE PROACTIVE

STRATEGIC Makes strategy Creates strategic

happen alternatives
OPERATIONAL Implements the Improves the basics
basics
 Competitive Advantage: From the Past to the Future
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 HR Competitive Advantage Index: -

Operationally Operationally Strategically Strategically

reactive Proactive Reactive Proactive

Low High
 Competitive Advantage: From the Past to the Future
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 Lifecycle of HR Competitive Advantage: -

25 Sustained Competitive Advantage
 Sustained Competitive Advantage
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 Wright, McMahan & McWilliams: -

 Resource based view of the firm

 Highly integrated HRM practices can help a firm

achieve a sustained competitive advantage (SCA) in
the marketplace
 For HRM practices to lead SCA, they must be
(Criteria for SCA status): -
◼ Valuable
◼ Rare
◼ Inimitable
◼ Non-substitutable
 Sustained Competitive Advantage (Contd.)
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 Congruence (Horizontal Fit) in the organization’s HR

system provides a distinctive CA
 Includes three components: -
◼ Managers must focus powerful forces on the target
behaviors they want to promote; they must use all the
HRM practices to influence employees’ motivation, ability,
and opportunity for important behaviors
◼ Managers must make sure that staffing, reward and
development practices do not conflict; that is, they must
ensure that HR systems do not encourage employee
behaviors which work against each other or are unwanted
 Sustained Competitive Advantage (Contd.)
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 Congruence (Horizontal Fit) in the organization’s HR

system provides a distinctive CA (Contd.)
 Includes three components (Contd.): -
◼ Mangers must ensure that interrelated HRM practices are
sufficiently supportive of each other since some HRM
practices require the support of interrelated HRM practices
in order to maintain targeted employee behaviors.
Managers should recognize complementarities or synergies
amongst a firm’s HRM practices.