Thursday 8 February 2007

The Contribution of the Resource Based View of Strategic Human Resource Management on Organisational Performance.

by

Kehinde Songonuga,
LBS,East Midland.
United Kingdom.






The resource-based view to strategic human resource management (SHRM) focuses on the costly to copy attributes of the firm as the fundamental drivers of performance and competitive advantage (Cooner 1991). Linking to the understanding of the resource based view of the firm; Barney (1991) described competitive advantage as “when a firm is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors”. The task is to maintain this competitive advantage in such a way that competitors’ efforts to replicate that advantage are frustrated and eventually cease. The resource-based view focuses on the promotion of sustained competitive advantage through the development of the human capital rather than merely aligning human resources to current strategic goals (Torrington et al 2002). This essay will show various ways on how the resource-based view of SHRM in organisations can contribute to enhanced organisational performance.


Human resources can provide competitive advantage for the business, as long as they are unique and can not be copied or substituted for by competing organisations, competitive success not coming from simply making choices in the present, but from building up distinctive capabilities over significant periods of time (Boxall 1996). Torrington et al (2002) argue that the focus is not just on the behaviour of the human resources, but on the skills, knowledge, attitudes and competencies which underpin this, and which have a more sustained impact on long-term survival than current behaviour. The central theme emerging in the SHRM resource-based literature is that privately held knowledge is a basic source of advantage in competition. The resource-based view generally addresses performance difference between firms using asymmetries in knowledge. A resource based theory of a firm thus entails a knowledge-based perspective; it blends concepts from organisational economics and strategic management (Barney 1991). According to this perspective, a firm’s ability to attain and keep profitable market positions depends on its ability to gain and defend advantageous positions in underlying resources important to production and distribution (Cooner 1991). Though the field of SHRM was not directly born of the resource-based view (RBV), it has clearly been instrumental to its development (Wright et al 2001). This was largely because of the RBV shifting emphasis in the strategy literature away from external factors towards internal firm resources as sources of competitive advantage (Wright et al 2001). The RBV view of competitive advantage differs from the traditional strategy paradigm in that its emphasis is on the link between strategy and the internal resources of the firm, and it is firm-focused, whereas the traditional strategic analysis concept has had an industry-environment focus (Schuler and Jackson 1999). Boxall (1996) argues that resources are not simply understood as assets in the formal accounting sense, but include any feature of the firm with value creating properties. This means that aspects of the business that are not formally owned by it, such as the talents and interactions of the people who work in it, are not ignored but come within the area of systematic interest. This justifies Barney (1991) argument that business excellence is not just about best- practice but about the intellectual capital and business intelligence to anticipate the future.


From the resource based view, in order for an organisation’s resources to contribute to enhanced organisational performance and maintain sustained competitive advantage, four criteria must be attributable to the resources: the resource must add positive value to the firm, the resource must be unique or rare among current and potential competitors, the resource must be inimitable and the organisation needs to ensure they are organised, this is also known as the VRIO framework (Golding 2004). Therefore, given resource heterogeneity, resource immobility and satisfaction of the requirements of value, rareness, inimitability, and organisation, an organisation’s resources can be a source of sustained competitive advantage (Schuler and Jackson 1999). Barney (1991) states that RBV makes it clear that firms can not expect to buy or purchase sustained competitive advantages, in that the advantages, if they exist, can only be found in the rare, inimitable, and non-substitutable resources already present in the organisation. Firstly, in order for human resources to exist as a sustained competitive advantage, they must provide value to the firm. Firms create value through either decreasing product/service costs or differentiating the product/service in a way that allows the firm to charge a premium price. Thus the ultimate goal of any HR executive is to create value through the HR function, but the first question that an HR executive must address is “How can the HR function aid either decreasing cost or increasing revenue?” (Barney and Wright 1998). Value to customers is an essential element of competitive advantage; therefore, for a resource to be a potential source of competitive advantage, it must be valuable or enable the creation of value (Fahy 1999). The HR function must be capable of making a difference in the organisation in the sense that it adds value in some way (Marchington and Wilkinson 2002). This is where the demand for labour is heterogeneous, and where supply for labour is heterogeneous-in other words where different firms require different competencies from each other and for different roles in the organisation, and where the supply of potential labour comprises individuals with different competencies (Torrington et al 2002). The suggestion of the RBV is that if HR wishes to be a “strategic partner”, they need to know which human resources contribute the most value that leads to sustainable competitive advantage in the business, as some human resources may provide greater influence for competitive advantage than others (Golding 2004). On this basis value is created by matching individual’s competencies with the requirements of the organisation and/or the job. Barney (1991) points that a resource must permit the firm to conceive of or implement strategies that improve its efficiency and effectiveness by meeting the needs of customers. This implies that though resources may meet other conditions, if they do not enable the creation of value, they are not a prospective source of advantage. The value of resources in an organisation is not enough to create sustainable competitive advantage, because if any other organisations hold the same value, then it will only provide competitive parity (Golding 2004). Therefore an organisation needs to consider the next level of the framework: rarity.


Rarity means there must be a shortage of these particular resources in the market to the extent that there are insufficient to go round all organisations (Marchington and Wilkinson 2002). The HR executive needs to consider how to develop rare characteristics of an organisation’s human resources to gain competitive advantage (Golding 2004). In some circumstances, the first organisation in an industry to implement an HR strategy can obtain competitive advantage over other firms (Barney 1991). If the HR strategy has value but no form of rarity, other organisations may develop an identical strategy or even something more unique, thereby displacing the first mover of sustained competitive advantage. A firm enjoys sustained competitive advantage when it is implementing a value-created strategy not simultaneously implemented by large numbers of other firms. If a particular valuable organisational resource is possessed by large numbers of firms, then each of these firms have the capacity of exploiting that resource in the same way, thereby implementing a common strategy that gives no one firm a competitive advantage (Barney 1991). Torrington et al (2002) argues that due to the normal distribution of ability, human resources with high ability levels are, by definition, rare. The goal of virtually all selection programs is to ensure that the organisation is hiring only the highest ability individuals. The issues then, are the validity of the selection system and whether or not the organisation is able to attract and retain those applicants considered to be of the highest quality (Torrington et al 2002). To observe that sustainable competitive advantage only accrue to firms that have valuable and rare resources is not to dismiss common organisational resources as unimportant. Instead, these valuable but common resources can help ensure a firm’s survival when they are exploited to create parity in an industry (Barney 1991). How rare a valuable firm resource must be in order to have the potential for generating competitive advantage is a difficult question. It is not difficult to see that if a firm’s valuable resources are absolutely unique among a set of competing firms, those resources will generate competitive advantage and have potential for creating sustainable competitive advantage (Barney 1991). Valuable and rare resources can create above normal profits for the firm in the short term; however, if other firms can imitate these qualities, then over time the characteristics will provide no more than competitive parity (Barney and Wright 1998).


In order for a resource to be considered a sustained competitive advantage and enhance organisation performance, human resources must be inimitable. The inability of competitors to duplicate resource endowments is a central element of the resource based view (Fahy 1999). Also competitors will not be able to duplicate the exact resource in question, as they will be unable to copy the unique historical conditions of the first firm. Wright et al (1992) use the concepts of unique historical conditions, casual ambiguity and social complexity to demonstrate the inimitability of competitive advantage stemming from human resources. Wright et al (1992) noted that this history is important as it will affect the behaviour of the human resource pool via the development of unique norms and culture. thus even if a competing firm recruited a group of individuals from a competitor they would still not be able to produce the same outcome in the new firm as the context is different. Causal ambiguity describes a situation where the causal source of competitive advantage is not easily identified and social complexity recognises that in many situations competitive advantage stems from unique social relationships that cannot be duplicated (Mahoney and Pandian 1992). Another reason that a firm’s resources may be inimitable is that they may be very complex social phenomena, beyond the ability of firms to systematically manage and influence (Peteraf 1993). When competitive advantages are based in such complex social phenomena, the ability of other firms to imitate these resources is significantly constrained. Lastly, to ensure the HR function can provide sustainable competitive advantage, the organisation has to be organised so that they can develop valuable resources that are rare and inimitable (Golding 2004). The organisation requires having in place the systems and practices that allow human resource characteristics to bear the fruit of their potential advantages. The question of organisation focuses attention on systems, as opposed to single HR practices (Barney and Wright 1998). This means a focus on horizontal integration of HR practices, rather than viewing each in isolation and the organisation ensuring that their policies and practices in the HR functional areas are coordinated and coherent, and not contradictory (Golding 2004).it is therefore clear that the employment of highly qualified and talented people can be useless without effective processes to ensure that they work well in combination and wish to contribute to organisational goals (Lado and Wilson 1994). According to the VRIO framework aspects of human resources that are valuable, rare, inimitable and appropriate HR systems in place could bring about sustainable competitive advantage.


Although RBV is of great use in helping to understand why differences exist between firms and consequently how certain organisations may be able to gain competitive advantage, it has notable potential limitations. Firstly it neglects the forces that lead to similarities in the same industry (Marchington and Wilkinson 2002). Barney and Zajac (1994) argue that RBV is tautological and does not generate testable hypotheses, recognising that most research applying the RBV has failed to test its fundamental concepts. Critics also point out that RBV focuses strongly on the internal context of the business. Some writers have suggested that the effectiveness of the resource-based view approach is inextricably linked to the external context of the firm (Golding 2004). There have been recognitions that the RBV approach provides more added value when the external environment is less predictable (Golding 2004). Priem and Butler (2001) argue that the static argument behind RBV is descriptive: it identifies generic characteristics of rent-generating resources without much attention to differing situations or resources comparisons. How the organisational resources generate sustainable rent is still not known other than through their heterogeneity. Although applications of RBV has taken variety of forms, ranging from high performance work systems and stocks of talent, to fit between employee skills and strategy it has employed a common underlying logic: human resource activities are thought to lead to the development of a skilled workforce and one that engages in functional behaviour for the firm, thus forming a source of competitive advantage (Wright et al 2001). Becker and Huselid (1998) note that this results in higher performance, which translates into increased profitability for the organisation. While this theoretical story is appealing, Wright et al (2001) notes that it is important to note that most of the empirical studies assess only two variables: HR practices and performance. While establishing such a relationship provides empirical evidence for the potential value of HR to firms, it fails to adequately test the RBV in two important ways (Wright et al 2001). First, no attempt has yet been made to empirically assess the validity of the proposition that SHRM practices are casually ambiguous, nor whether they are actually difficult to imitate. Boxall and Steeneveld (1999) argue that while instinctively obvious and possibly supported by subjective data, the field lacks verifiable quantitative data to support these declarations. That virtually anything associated with the organisation can be a resource suggest that prescriptions of dealing in certain ways with certain categories of resources might be operationally valid, whereas other categories of resources might be inherently difficult to measure and manipulate, one example of a resource that might be difficult to measure is tacit knowledge (Lado and Wilson 1994). Some have argued for tacit knowledge-that understanding gained from experience but that cannot be expressed to another person and is unknown to oneself-as a source of competitive advantage (Lado and Wilson 1994). Lado and Wilson (1994) argue that this may be descriptively correct, but it is likely to be quite difficult for practitioners to effectively manipulate that which is inherently unknowable. Mabey et al (1998) argues that in various researches carried out, there has been no strong statistical correlation between HR programmes supported by senior management and company performance. Other authors have anticipated this evidence as confirmation that managerial policies have no significant impact on an organisation’s economic performance (Mabey et al 1998). Priem and Butler (2001) also noted that in RBV studies, researchers sometimes take a frequently research strategy subject area, relabel the independent variables as “resource” and the dependent variables as “competitive advantage” and use measures common to much cross-sectional strategy research as operationalization. Together, these issues suggest that the current high level of abstraction found in the static approach to the RBV might be one thing that could limit its usefulness for strategy (Priem and Butler 2001).


In a response to criticism from the resource-based theorists, Porter(1991) argues that resources are not valuable in and of themselves, but because they allow organisations to perform activities that create advantages in particular markets, add that it seems safe to suggest, however, that what the resource-based view has stimulated is a re-balancing of the literature on strategy in a way that stresses the strategic significance of internal resources and capabilities and their historical development. Boxall (1996) argues that those organisations which combine high levels of competence in multiple modes of strategy making appear to be the highest performers, and not only those organisations with astute leadership at the top but those that can combine this strength with deep employee involvement in strategic decision-making appear to be more effective. In this way the resource based view suggest an integration of theory on strategy process and strategic content. (Boxall 1996). RBV can provide a strong base for strategic HRM. The aim of RBV is to improve resource capacity-achieving strategic fit between resources and opportunities and also obtaining added value from the effective deployment of resources (Peteraf 1993). The RBV theory provides a rationale for strategic HRM and in line with intellectual capital theory, RB theory emphasises that investment in people add to their value to the firm (Armstong and Baron 2002).


The resource-based approach provides a framework for examining the pool of human resources that may be either able or unable to carry out a given strategy during the formulation phase of SHRM. Thus the resource-based view may demonstrate the fact that strategies are not universally implementable, but are contingent on having the human resource base necessary to implement them. RBV focuses on the analysis of internal strengths and weaknesses, paying particular attention to the ways in which firms can develop valuable resources and erect barriers to imitation of them. It is however, without conceptual weaknesses. Strategy analysts should remember that the firm exist in environments: resources are not ends in themselves but are useful when they create value markets.































REFERENCES

ARMSTRONG, M. and BARON, A. ( ) Strategic HRM: The key to improved business performance. London, CIPD.
BARNEY, J. (1991) Firm resources and sustained competitive advantage. Journal of management, 17 (1).
BARNEY, J. and WRIGHT, P. (1998) On becoming a strategic partner: The role of HR in gaining competitive advantage. Human resource management, 37 (1).
BARNEY, J. and ZAJAC, E. (1994) Competitive organisational behaviour towards an organisationally based theory of competitive advantage. Strategic management journal, 15 (5).
BECKER, B. and HUSELID, M. (1998) High performance work systems and firm performance: A synthesis of research and managerial applications. Research in personnel and human resource management, 16.
BOXALL, P. (1996) The strategic HRM debate and the resource-based view of the firm. Human resource management journal, 6 (3).
BOXALL, P. and STEENEVELD, M. (1999) Human resource strategy and competitive advantage: A longitudinal study of engineering consultancies. Journal of management studies, 36 (4).
CONNER, K. (1991) A historical comparison of resource-based theory and five school of thought within industrial organisation economics: Do we have a new theory of the firm? Journal of management, 15 (5).
FAHY, J. (1999) Strategic marketing and the resource-based view of the firm. Marketing science review, [online] (10).
GOLDING, N. (2004)
MABEY, C., SALAMAN, G. and STOREY, J. (1998) Strategic human resource management. London, Sage publications.
MAHONEY, J. and PANDIAN, J. (1992) The resource-based view within the conversation of strategic management. Strategic management journal, 13 (5).
MARCHINGTON, M. and WILKINSON (2002) People management and development: Human resource management at work. UK, CIPD.
LADO, A and WILSON, M. (1994) Human resource systems and sustained competitive advantage: A competency-based perspective. Academy of management review, 19 (4).
PETERAF, M. (1993) The cornerstone of competitive advantage: A resource-based view. Strategic management journal, 14 (3).
PORTER, M. (1991) Towards a dynamic theory of strategy. Strategic management journal, 12 (2).
PRIEN, R. and BUTLER, J. (2001) Is the resource-based view a useful perspective for strategic management research? Academy of management review, 26 (1).
SCHULER, R. and JACKSON, S. (1999) Strategic human resource management. Oxford, Blackwell publishers.
TORRINGTON, D., HALL, L. and TAYLOR, S. (2002) Human resource management. UK, Pearson education.
WRIGHT, P., DUNFORD, B. and SNELL, S. (2001) Human resources and the resource-based view of the firm. Journal of management, 27.


Stoik Musah and Kenneth Songunuga writes from LBS,United Kingdom. Email stoik_joy@yahoo.com

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