Strategic Human Capital Paradoxes…

For a PDW, I was asked to develop a short list of paradoxes linked to the strategic human capital (spoiler alert for those of you planning to be at the session at 8am on Friday). I’m sure some of them would not surprise you in the least. Others might spur some discussion though. Here is the short list:

  • Rent from human capital may not show up in profitability
  • “Who” is a firm?
  • Firm-specificity isn’t as important as we might think
  • HR Departments may not matter much
  • High performance work systems don’t tell us much about such advantages

Rent. The first point is what you would expect from me so let me dismiss it quickly. Obviously, if rent is linked to human capital, some portion of it is likely to be captured by people. Nuff said.

Who is a firm? A sharp distinction is made between hiring on the spot market and an internal labor market. Rightly so. However, one might think that once labor is “internal” such people are part of the firm. Nevertheless, they are still often treated as “external suppliers”in the context of rent appropriation. The average strategy person still feels that the only rent that counts in a competitive advantage is what flows to shareholders. More importantly, this gets at our definition of what is a firm? If we take micro-foundations seriously, we also have to nail down which stakeholders should be considered part of the firm. I think this extends to other supposedly external stakeholders as well. For example, even non-equity alliances may be enduring partnerships that function like part of a firm (e.g., going back to Barnard, “a system of consciously coordinated activities“). Ok, I know I’ve been harping on that for a number of years as well. Let’s move on…

How much does firm-specific human capital matter? Much of today’s theory here is based on Becker’s classic analysis, which assumes the value of those with firm-specific human capital is lower in other firms. Williamson borrows liberally from Becker as he describes the problem as a bi-lateral monopoly. However, this imposes very strong assumptions on the market’s ability to perceive and value firm-specificity. Assumptions that are not borne out if you look at the way labor markets work. More troubling is the fact that firms actively seek individuals who can and will make firm-specific investments. Typically, the best possible signal is the fact that they have already done so at another firm (this is one reason why recommendations are so important). Consider hiring at your institution. Do you really want to hire a person who has avoided all service commitments at their prior institution? Removing the disincentive for individuals to make firm-specific investments changes the dynamic dramatically. How does this alter our view of human capital-based competitive advantages? Ed Lazear’s recent work illustrates benefits of a renewed and more nuanced look at general human capital.

Do HR departments matter? Some might assume that strategic human capital implies that HR departments would be more important. However, where HR is most critical to a firm’s strategy, key decisions are most often made by line managers (e.g., professional services, R&D, sports…). Entrepreneurial firms often lack HR departments altogether. It is unfortunate that some view the field as closely tied to a functional area — we might miss the most important research problems.

Do high performance work systems matter? There are certainly HR best practices. However, HR professionals (and organizations like SHRM) actively help to transfer these across firms. There is no perceived conflict of interest — it’s part of being a professional HR manager. We should be asking how such practices are co-specialized to idiosyncratic aspects of firms. These might produce enduring performance differentials. Unfortunately, there is little research in this vein…

If you are addressing these types of questions in your research, please consider submitting a paper to the Journal of Management special issue that Pat Wright, Tom Moliterno and I are editing.

In the spirit of human capital-oriented paradoxes, let me end with this:

3 Comments on “Strategic Human Capital Paradoxes…”

  1. srp says:

    Ooh, ooh, can I play? (Not going to be at AOM this year.)

    The first two paradoxes (rent to human capital and who is a firm) are basically unit of analysis and self-reference problems. Unit of analysis means who is the decision maker our theories and advice are meant to assist and what stakeholders are included in his objective function. Self-reference in this context means that we can’t include understanding of the theory we are propounding as a source of human capital without creating a logical paradox. Step around these two issues with clear definitions and the problems can be avoided.

    Firm-specific human capital is, by definition, less valuable outside the firm where it is relevant. Your point is that the acquisition of such human capital may be correlated with the possession of a general trait in the worker that makes him more willing or able to make such investments. So possessing firm-specific human capital at Firm A is a credible signal that one will be willing and able to do the same at Firm B. Maybe–but this seems like a perilous assumption given the vicissitudes of employee aging, different firm contexts and cultures, etc. For example, a near-the-end-of-his-career big-shot academic moving to a less-prestigious school in return for a big salary may not be your best bet for an investment in institution building at his new locale.

    Do HR departments matter? No.

    Do high-performance work systems matter? Here’s the thing–I’m not sure you need co-specialization to a particular firm’s idiosyncracies to get them to matter. I’m teaching corporate strategy this summer and so once again mulling the issue of conglomerates like Danaher and GE. Danaher is pretty focused on manufactured products where high precision is called for, but the range of markets is fairly broad (e.g. medical instruments and motor controllers). Yet they hit every acquired firm with a full indoctrination into the Danaher Business System, a combination of tight financial controls and 1980s-style Japanese lean manufacturing concepts (I picture the CEO clinging to his Member’s Only jacket as he participates in kaizen exercises with the newbies). And it does seem to raise the productivity and quality of the acquired firms (maintaining innovation is another matter), even though the techniques are pretty generic. But only some of the managers from the acquired firm are able to transition to the new system–others wash out, can’t stand it, or are fired right away as not fitting in. So why are there still target firms that this generic set of practices can improve? The barriers to implementation may be more along the lines that Gibbons and Henderson have been pushing, having to do with relational contracts causing cultural stickiness, than any sort of co-specialization.

    Feel free to use or mock any of these ideas at the PDW.

  2. RussCoff says:

    Those are excellent points Steve — go to the head of the class.

    The perspective issue is at the forefront. It is probably clear that an academic endeavor aimed at legitimating a functional area (like HR) is not ideal. However, strategy faces a similar problem if we seek to serve (often atomized) external investors.

    The MA example is illustrative and clearly implementation problems are a factor (and this is what HR folks typically argue). A key difference is the presence of a cadre of professional HR managers and related professional organizations dedicated to transferring such best practices.

    • srp says:

      Whom do we serve? That has both normative and descriptive dimensions. Descriptively, we usually act as though we are serving the loyal managerial agents of a firm’s owners. Certainly we don’t put any effort into advising managers on how to screw their own shareholders.

      At Danaher, HR helps manage the administration of the DBS indoctrination, but I got the impression from the case that the actual exercises were conducted by functional managers on loan from manufacturing, finance, etc. Is it typical to have HR people who would know about statistical process control, TQM, just-in-time inventory, etc. at a nuts and bolts level? I would think not.

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