Strategic Human Resource Management: A Key Determinant of Firms’ Competitive Advantage

Summary: In the current business environment, firms usually face steep competition from their rivals. A new product and service would be imitated shortly after their introduction to the market. To survive and prosper, firms have to constantly innovate and renew themselves. These strategic goals cannot be realized if there are no right human resource (HR) strategies. This short article explains why firms are adapting strategic human resource management (SHRM) instead of traditional human resource management (HRM) programs. It also justifies why HR strategies contribute to firms’ competitive advantage. It also makes some recommendations firms should consider so that they can develop an effective SHRM that promotes their innovation and competitive advantage.

HRM has received less attention compared to its peers (i.e., R&D, Marketing, Accounting & Finance) because firm performance is easy to be attributed to a new discovery from R&D or to an effective marketing campaign. However, this mentality has been shifted in the last several years. Tech giants, including Apple, Alphabet (Google), Microsoft, Meta (Facebook), and others, have increasingly paid attention to HR. These firms have come up with different HR strategies to promote innovation, improving firms’ competitive advantages. Innovation especially does not come from vacuum, but it is rooted in employees’ knowledge, capabilities, and skills. Achieving strategic goals such as profit growth, customer base enlargement, and new market expansion requires a strong commitment from managers at all levels and a strong leadership from senior executives. In other words, all factors affecting a firm’s competitive advantages are built on the quality of the firm’s workforce. In practice, a firm’s workforce consumes about 65% of its total expenses. As a result, firms have started treating HR as strategic assets that can boost innovation and competitive advantage.

This short article has four objectives. First, it will clarify the definition of SHRM and differentiate it from the more traditional HR practices, called HRM. Second, it will elaborate the crucial role of SHRM in firms’ strategy execution process. Third, the article will provide justifications and evidences to explain why HR strategies determine firm performance, including firm innovation and competitive advantage. It is noteworthy that this is the very first article out of a series that focuses on the linkages among HR strategies, innovation, and firm’s competitive advantage.

HRM, SHRM, Innovation, and Competitive Advantage

The concept of HRM is not new to researcher and practitioner communities. HR professionals are usually responsible for employee selection, training and development, evaluation, and compensation. Together with other line managers, HR professionals help solve the issues related to employee relations. These HR activities tend to be daily routines and taken for granted, and their importance is less perceived. The popular belief that HR activities are to support other departments in the process of creating customer value. They do not directly produce a product or perform a service, so their contributions to firms’ profits are hard to be documented, using some financial metrics. As a result, the participation of HRM in the process of strategy formation and implementation was not strongly encouraged.

However, in recent years, firms’ strategic goals such as profit growth, customer base enlargement, and new market expansion, are hugely affected by their capabilities of sale increases, new customer acquisition, and introduction of new products and services. These capabilities are mainly determined by the quality of a firm’s workforce and by the effectiveness of HR strategies. Specifically, firms have to develop right strategies to attract most talented people and retain them. Employee selection and retention are not enough. HR practices have to promote their engagement, commitment, and the willingness of going extra miles. When HR is designed to help firms achieve their strategic goals, it becomes strategic HR, and HRM becomes SHRM. In SHRM, all HR practices are not routines and taken-for-granted activities, but they are planned and integrated strategically to serve the firm’s strategy execution process.

There are other popular strategic management’s concepts such as innovation and competitive advantage. Innovation is defined as the process of creation and commercialization of new products or services. In the broader sense, innovation is used to describe firms’ strategy renewal, efficient use of resources, new organizational structures, or new production processes. Competitive advantage is used to describe firms outperforming their competitors by attracting large number of customers and providing them with superior products or services. There is a close relationship between innovation and competitive advantage. The ultimate goal of any businesses is to make profits and grow shareholder value. To maximize profits without compromising business ethics, firms have to outcompete their competitors based on their competitive advantage. Competitive advantage depends on several factors and innovation is its’ most important determinant.

SHRM and Firms’ Competitive Advantages

Currently, tech giants including Apple, Alphabet, Meta, Microsoft, and others have elevated HR to be their core strategic assets that determine the success of their strategy implementation process. Strategic management literature points out that strategy execution requires the participations from every aspect of organization, including organizational structure, decision making process, organizational culture, and control and incentive systems. All of these components are built on people whose knowledge, skills, values, commitment, and engagement directly affect every step of the strategy implementation process. Apple, the most valuable firm in the United States (U.S.) and the world in term of market capitalization that has been around 3 trillion dollars (This number is approximately equal to the size of French economy), has been pursuing differentiation strategy.

As many of you know, the differentiation strategy requires firms to develop products that are superior than their rivals’ in quality, functions, models, features, and the like. iPhone, the most successful product from Apple and therefore the cash cow of the firm, has beaten Nokia and Motorola and made their cellphones almost extinct. Indeed, iPhone has a variety of functions (i.e., high-quality camera and numerous Apple apps just to name a few). Its style looks elegant, and especially Apple keeps introducing new generations of iPhone. Apple has consistently achieved its strategic goals by focusing on its SHRM through its special Talent Management in which the firm attracts the most talented programmers whose knowledge and skills will be blossomed at the firm’s campus, thanking to its genius HR practices.

 Similar to Apple, Alphabet’s success story is also contingent on its SHRM that called People Operation. Alphabet has aspired for being a world leader in data organization. Thanks to its strong resources and capabilities, the firm has diversified its products and services in other industries including smartphones, computers, and driverless cars (Waymo project). To achieve these strategic goals, Alphabet has made used of its People Operation to recruit the most talented people, ranging from software-programming engineers and sale force to senior executives. With its mantra “find them, grow them, keep them”, People Operation has helped the firm actualize numerous “shoot for the moon” projects. Indeed, Google, one of its well-known products, is still a dominant search engine. Gmail has been used by billions of users. Google Map is the world’s most popular app. The firm has just introduced Pixel 6, and its driverless cars are on the testing period.

At early stage, Alphabet realized the role of its workforce in the possibility of achieving its strategic goals, and the People Operation was created to study how the firm can recruit, develop, and retain the most talented people. This program utilizes “talent analytics” to identify who fit into its corporate culture. It also makes use of data to learn how to promote employee engagement and retention at the firm. The firm also allows employee to take 20% working time off to work on whatever they like, and projects at the firms are normally the fun ones. Alphabet also gives free food for their employees, and the food is carefully studied so that it provides enough nutrition. These activities seem to be nominal and be easy to be taken for granted, but they are deemed to promote engagement and innovation among employees, and innovation boosts the firm’s competitive advantage. In short, Alphabet’s SHRM has been crucial to its success, and its unlimited capabilities of innovation ensure the firm to be ahead of the game in any competitions with other tech giants.

How to Develop a SHRM to Boost Firms’ Competitive Advantages

 As most successful firms in the world have utilized SHRM under different names such as People Operation, Talent Management, and Talent Acquisition in order to help them actualize their strategic goals such as profit growth, customer base enlargement, and new market expansion. Strategic management literature suggests that firms’ resources have to be rare, valuable, inimitable, and nonsubstitutable. When SHRM is a firm’s strategic resources, it has to satisfy these four criteria. It is not extremely hard for firms to recruit talented employees, but it is not an easy task to build HR programs so that they can facilitate and boost firms’ strategy execution process. Apple and Alphabet have designed HR programs that have helped the firms achieved their strategic goals, being leaders in technological innovation and developing the most successful and popular products. At these firms, HRM has become SHRM due to the role of HR in their accomplishments. However, firms cannot completely replicate HRM models from these firms due their inimitable nature. If these HR strategies are easily imitated, they are not SHRM anymore, but they are simply HRM. However, it does not mean that we cannot learn anything from the best HR practices I have discussed. Here are some effective practices firms should pay attention to when attempting to develop HR strategies that can be converted into their competitive advantage.

First, firms should carefully analyze their current internal and external environments. At this stage, they should use some popular techniques such as PESTEL analysis (PESTEL is an acronym of politics, economics, socio-culture, technology, environment, and legality), SWOT analysis (SWOT is an acronym of strengths, weaknesses, opportunities, and threats), Porter’s Five Forces Model, and Value Chain analysis. Scrutinizing firms’ internal and external environments is the common practice before executives formulate any strategy. While the external environment may be similar to firms in the same industry, the internal environment tends to be heterogeneous. Therefore, borrowing best HR practices without considering a firm’ specific context would end up failures.

Second, firms should study best HR practices that are being used by successful companies. For instance, firms may borrow some ideas from Alphabet’s People Operation, Apple’s Talent Management, or SAS’s Talent Acquisition (SAS, a data analytics firm in North Carolina, has been consistently named the best place to work for millennials). There is a story that Alphabet sent a group of HR professionals to SAS to study why this firm has been named the title “best places to work” for years. It should be noteworthy that Alphabet is smart enough to develop its own HR strategies that are fit in its organizational culture after consulting HR practices from SAS.

Third, when developing HR strategies, firms should focus on employee empowerment and employee engagement. Interestingly, employee engagement is often the outcome of employee empowerment. Firms can empower their employees by respecting their voice and even soliciting their feedback. Employee empowerment is also achieved by encouraging employees to pursue the projects they are interested in. Alphabet allows their employees to take 20% time off to work on any projects they are enthusiastic about. Microsoft used to value the employees who commit to long-working hours, but this practice has been modified recently. The firm has relaxed their working environment because the relaxing environment seems to encourage creativity and innovation.

Fourth, new strategic HR programs will not successful if there is a lack of leadership from senior executives. The leaders should provide opportunity for managers at all levels and employees to participate in the strategy formulation and execution process. Importantly, any HR initiatives should be in line and support a firm’s strategic goals. For example, the strategic goal of Southwest Airline, one of the biggest airlines in the U.S., is to create a friendly environment in their flights, so the firm has developed the selection program that can help identify candidates who have high level of affect, creativity, and friendliness. Employees with these qualifications are likely to step out to help customers in innovative ways.

Conclusion

Given that HR plays a vital role in the process of strategy formation and execution, firms have attempted to develop HR strategies that can help them achieve their strategic goals. There are no one-size-fit-all HR practices that can apply to all organizations. Before developing any HR strategies, firms should thoroughly investigate their external and internal environments. Then firms study the best HR practices that have been used by successful firms. Employee empowerment should be the focal point of any new HR initiatives. Also, new HR initiatives are hard to be fruitful if they are not encouraged by a strong leadership. 

[Tiếng Việt]
Chiến Lược Về Nhân Sự: Nhân Tố Quyết Định Lợi Thế Cạnh Tranh Của Doanh Nghiệp

Leave a Reply

Your email address will not be published. Required fields are marked *