Human resources (HR) represent a key element for the enterprises survival and growth, many times being considered as firm’s most important asset. According to Becker and Gerhart (1996:779) both theoretical and empirical research in the field of human resources suggest that “the role of human resources can be critical”. They continue arguing that human resources decision might affect organizational performance either by improving efficiency or by contributing to revenue growth. In accordance with the resource based view (RBV) of the firm, the human resources are a relevant source for organization’s competitive advantage (Wright et al. , 2001).
Becker and Huselid (1998) suggest that the human resources could lead to higher operational performance, leading to increased profitability which consequently results in higher stock prices. Gelade and Ivery (2003) provide empirical evidence that human resources management (HRM) decisions, climate and organization performance are connected. Moreover, Schutz (1994) suggests that high performance environments, which fulfil human, social, and psychological needs, make possible for organizations to benefit from increased productivity, product quality innovation, and flexibility.
However, HRM functions and activities can not be undertaken in a vacuum. Diverse internal and external factors influence the way firms implement human resource policies. The role of this paper is to explore those factors and to discuss of the role of human resources for attaining competitive advantage and increasing firm performance. The structure of the paper is as follows. In the next section, I present recent theoretical developments that underline the importance of human resource management within the firm. In the third section, I discuss the main internal and external factors that influence the role of HRM in organizations.
In section four, I review the relevant literature linking HRM to firms’ performance. Finally, some conclusions are drawn. 2. Human Resource Management and Competitive Advantage The issue of what contributes to competitive advantage has seen a shift in emphasis from external positioning in the industry and the relative balance of competitive forces, towards the acknowledgement that internal resources are viewed as crucial to sustained effectiveness (Wright, et al. , 2001). The work of Penrose (1959) represents the beginning of the resource based view of the firm, later articulated by Rumelt (1984), Barney (1991) and Dierickx and Cool (1989).
According to the resource based view, firm resources are sources of competitive advantage. Competitive advantage is defined by Barney (1991:102), as occurring when a firm “is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors”. This author also emphasizes that an important implication of the resource based view is that a broad range of individual, social and organizational phenomena within the firms that are analyzed by organizational theory and organizational behaviour may be sources of sustained competitive advantage.
In this sense, Stiles and Kulvisaechana (2003) state that competitive advantage is not dependent, as traditionally assumed, on such bases as natural resources, technology, or economies of scale, since these are increasingly easy to imitate. Rather, competitive advantage is, according to the RBV, dependent on the valuable, rare, and hard-to-imitate resources that reside within an organisation. Human capital might be viewed as an invisible asset (Itami, 1987).
The importance to the strategic aims of the organisation of the human capital pool (the collection of employee capabilities), and how it is managed through HR processes, then it becomes apparent. In terms of rarity: “If the types and levels of skills are not equally distributed, such that some firms can acquire the talent they need and others cannot, then (ceteris paribus) that form of human capital can be a source of sustained competitive advantage” (Snell et al. , 1996:65).
Concerning inimitability, there are at least two reasons why human resources might be difficult to imitate: causal ambiguity and path dependency (Becker and Gerhart 1996, Barney 1991). “First, it is difficult to grasp the precise mechanism by which the interplay of human resource practice and policies generates value… second; these HR systems are path dependent. They consist of policies that are developed over time and cannot be simply purchased in the market by competitors” (Becker and Gerhart 1996:782).
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