Porter’s (1985) model of sustained competitive advantage (SCA) and Barney’s (1991) Resource-Based View (RBV) of the firm serve as the excellent frameworks for examining the importance of Human Resources Management in Organizations. Porter (1985) suggests that a competitive advantage occurs when a firm is able to deliver the same benefits as competitors at a lower cost or deliver benefits that exceed the firm’s competition. Thus, a firm’s competitive advantage lies in the actions taken to create a defendable position in an industry and generate superior return on investment.
Porter (1985) tends to focus on very tangible sources of competitive advantage such as the low cost and inimitability of products or services. Barney (1991) supports the theory of SCA. However, he suggests that there are additional sources of competitive advantage that are more intangible. These intangible sources of competitive advantage lie in the people and practices used to add value and uniqueness to an organization (Barney and Wright, 1998). Creating and sustaining a competitive advantage in the growing global market is becoming increasingly important (Porter, 1985).
All organizations aim to produce a product or provide a service that customers will choose over that of their competitors. Even non-profit organizations maintain a certain level of competitiveness in order to receive continued funding and community support. It is obvious that poor performance and decreased organizational income may be detrimental to the success of any organization. In most industries, some firms are more profitable than others regardless of the average profitability of the industry. Conceivably, these superior performers may posses something special, unique, and hard to imitate that allows them to outperform their rivals.
These successful firms may have a specific brand or product, operate in a more efficient manner, or have more capable and skilled employees that better contribute to the success of the organization. These unique resources and skills are referred to as sources of competitive advantage (Bharadwaj, Varadarajan, & Fahy, 1993). Creating and sustaining a competitive advantage in the growing global market has become more important than ever (Porter, 1985). A competitive advantage occurs when a firm is able to deliver the same benefits as competitors but at a lower cost or deliver benefits that exceed the firm’s competition.
Thus, sustained competitive advantage (SCA) allows the firm to create superior value for its customers and increased profit for itself (Porter, 1985). This increased profit is often assessed by researchers and organizational leaders by analyzing the financial performance of the firm. For example, both economists and researchers continually evaluate the variables that impact profitability. Successful financial performance is of interest for both organizational leaders and researchers regardless of industry type, tax or union status, or whether those organizations are public or privately owned.
(Den Hartog and Verburg, 2004) A number of researchers have investigated the relationships of specific organizational variables and firm level performance. Carmeli and Tishler (2004) have examined “intangible” sources of competitive advantage including management capabilities, human and organizational resources and skills, and the firm’s external reputation. The idea of human capital as a factor in a firm’s financial performance has also gained the interest of researchers and is consistent with Barney’s (1991) Resource-Based View of organizations.
When looking at organizations through a Resource-Based View (Barney, 1991), firms utilize their resources and capabilities to create a competitive advantage that ultimately results in superior value creation. Firm resources and skills are considered valuable when they aid the firm in formulating and implementing strategies that improve firm efficiency and/or the effectiveness. (Bharadwaj, Varadarajan, & Fahy, 1993). Barney and Wright (1998) argue that the firm’s most important asset in the race to achieve competitive advantage is the firm’s human resources.
Barney’s (1991) Resource-Based View of the firm provides an economic foundation for examining the role of human resources in firm competitive advantage. This view focuses on firm resources that can be sources of competitive advantage within the industry. Specifically, Barney (1991) suggests that the firm’s structure; human capital including the skills, judgment, and intelligence of the firm’s employees; and human resource management systems are sources of competitive advantage. A number of researchers have used the Resource-Based View to investigate the role and impact of human resources and human resource management systems in organizations.
Wright and McMahan (1992) contend that human resources can provide a unique source of competitive advantage that is difficult for competitors to imitate. This form of “human” capital can add to the organizational competitive advantage when four basic requirements are met: (1) employees must add value to the firm’s production processes, meaning that individual performance must matter, (2) the skills the firm seeks must be rare and not easily obtainable by competitors, (3) employee skills and knowledge must somehow be firm specific and not easily imitable.
As noted by Wright and McMahan (1992), human resources are not subject to the same degree of imitability as equipment or facilities, however, the investment in firm specific human capital, through training and development may further decrease the probability of imitation by making the firm’s employee’s knowledge base and capabilities different from its competitors. The final criterion (4) is that the firm’s human resources may not be subject to replacement by technology or other substitutes.
Although labor-saving technologies may limit the returns for some forms of investment in human capital, the continuing shift toward a more service related economy makes such forms of substitution increasingly less probable (Husleid, 1995). The work of Wright and McMahan (1992) contributes and directs us to the importance of human resources in the creation and sustainment of competitive advantage. Consistent with the Resource-Based View of the firm and supporting the findings of Wright and McMahan (1992), Carmeli and Tischler (2004) reported that human capital has a positive influence on firm performance.
Further, Choo and Bontis (2002) summarize the importance of human capital’s positive influence on firm performance by stating that “human capital is the profit lever of the knowledge economy” (p. 225). This view then suggests that human resource systems can contribute to sustained competitive advantage through facilitating the development of competencies that are firm specific, produce complex social relationships, are embedded in a firm’s history and culture, and generate tacit organizational knowledge (Barney, 1992).
Den Hartog and Verburg (2004) suggests for SCA to be truly sustainable it needs to be based on the assets and skills possessed by the firm. Thus, superb management of human resources is a means of gaining competitive advantage through one of a firm’s most significant assets: its people (Carmeli and Tischler, 2004). The HR capabilities of a firm are a considerable resource that may determine the competitive advantage of a firm (Karami, Anoloui, & Cusworth, 2004).
In fact, the sustained superior performance of the most admired companies has been attributed to unique capabilities for managing human resources to gain competitive advantage (Choo and Bontis, 2002). Although there is a significant amount of research in the area of human resources and competitive advantage, most researchers have focused on the specific organizational and individual HR factors related to firm performance. Most studies have also been limited to public organizations where firm performance is more easily measured in financial terms (Kontoghiorghes, 2003).
Few have examined the system of human resource inputs, processes, and outputs or its effect on firm performance. Organizations wishing to achieve a sustained competitive advantage over their competitors must provide a unique low cost product or service (Porter, 1985). One unique source of competitive advantage is people. Firm specific employee skills and knowledge accompanied by effective human resource management practices may be one way organizations can achieve a competitive advantage (Barney, 1991).