Human Resources and Organisational Performance

The relationship between human resource management and organisational performance has been the subject of extensive research for over two decades (Guest, 2011) however, a definitive answer regarding the relationship between them remains tenuous, with the question of whether performance is driven by external industry factors or firm-specific factors remaining an open debate (Brahma & Chakraborty, 2011). One conceptual framework that has been used extensively to explore the relationship is the resource-based view of the firm (RBV). This article aims to evaluate the RBV framework by discussing its contributions and shortfalls in relation to explaining the human resource management and organisational performance link.

To begin with, a modern definition of the resource-based model is necessary. The RBV can be defined as a model of organisational competitiveness and sustainability, where organisational resources are classified as physical, human and organisational capital, and the internal environment of the organisation is perceived to be of equal or greater importance than its external industry contexts. This includes three major foci: employees’ knowledge, capabilities and dynamic capabilities (Nankervis, Baird, Coffey & Shields, 2014).

Initially founded by Penrose (1959) by describing a firm as a collection of both physical and human resources, Penrose (1959) posited that it is the heterogeneity of the services extracted from those resources that gives each firm a unique character. Wernerfelt (1984) built upon this by defining a firm’s resources as tangible and intangible assets, with the competition for resources and each firm’s individual resource profile impacting the ability for the firm to gain competitive advantage. Although seemingly basic when compared to modern-day observations of strategic operations, Penrose’s analysis was in stark contrast to the existing literature at the time, which focused on the external market of the organisation, and caused a dramatic shift in assessing the internal operations of the firm. This analysis has become a fundamental premise of business strategy (Boxall & Purcell, 2016), illustrating that firms are heterogeneous and possess dynamic capabilities that are to be managed effectively, and that it is the effective management of these capabilities that account for major performance variations amongst firms existing in the same environment (Nelson, 1991). These foundational observations essentially put people, and the human resource function, on the radar in relation to competitive advantage and profitability.

Penrose’s observations have been substantiated by a number of empirical findings. Jacobsen (1988) found a positive correlation between positive firm-level factors and firm profitability, suggesting it is the firm-specific operations and not the industry factors that explain greater variance a firm’s profitability. Furthermore, Rumelt (1991) found that organisational performance varies based on differences in firm resources and the management of those resources. Arthur (1994) stated that it was through developing a human capital pool that was highly motivated and empowered, along with a commitment-enhancing human resource system that led to higher productivity. These findings indicate the manner by which Penrose’s initial analysis, and Wernerfelt’s subsequent additions to the theory, has paved the way for a more in-depth and analytical exploration of their observations, with many researchers such as the aforementioned authors constructing theories and testable hypotheses from the foundations of their work.

Building upon Penrose and Wernerfelt’s initial work, Barney (1991) constructed a framework of the RBV, which was considered to be the first formalisation of the resource-based view of the firm (Newbert, 2007). Using the VRIO framework, consisting of value, rareness, imitability and organisation (Barney, 1995), Barney (1997) added to the RBV and organisational performance link by stating that an organisation gains competitive advantage from the resources it possesses, and that firms can create value through decreasing product/service costs or differentiating the product/service in a way that allows the firm to charge a premium price. Barney posited that the human resource function is central to creating value, and therefore positive organisational performance, through its instrumental role in aiding the firm to decrease costs or increase revenues through unique HR systems and practices.

According to Barney (1997), the key to competitive advantage is for the firm to uncover unique resources out of the vast pool of resources the firm possesses that are a source of competitive advantage, and this is done through the use of the VRIO framework. A resource is a source of competitive advantage if it is rare, valuable, inimitable, and non-substitutable. The human resource professional is therefore responsible for implementing HR practices that develop and exploit the employee’s valuable, rare, inimitable and/or non-substitutable qualities in order to boost employee morale and productivity, in order to develop a company personality and culture that is unique, which therefore aids in achieving competitive advantage amongst competing firms that cannot match the unique systems and processes. In relation to modern-day systems, high-performance work systems and high-involvement work systems that boost morale, empowerment and communication channels between employees and the organisation that are used in advanced HR practices today are a direct result of constructing an HR system that satisfies the VRIO framework (Shin & Konrad, 2014).

The framework that is discussed within the VRIO model in relation to constructing effective HR processes and practices has been proven to be effective in aiding organisational performance through research. Scheider and Bowen (1985), for instance, found significant relationships between positive HR practices and positive employee attitudes, which then had a significant effect on customer reports of quality of service within the banking sector. A positive assessment in quality of service may in turn lead to returning customers, therefore positive HR practices aid in assisting an organisation to boost customer loyalty. Furthermore, Wiley (1991) found that employee attitudes and job satisfaction were correlated to measures of organisational performance. Evidence also suggests that employee empowerment (a valuable practice if implemented effectively) is associated with positive employee attitudes and organisational innovation (Yang & Konrad, 2011), which aids to overall organisation performance. This research demonstrates how the VRIO framework could be used to analyse the potential for firm resources to be sources of competitive disadvantage, competitive parity, competitive advantage or sustained competitive advantage (Barney, 1997). It further points organisational leaders and HR professionals to which resources are to be nurtured and maintained in order to gain competitive advantage in the future (Barney, 2001).

Although there is an accumulation of evidence towards a link between the resource-based view and organisational performance, the ability to research the framework empirically in order to attain a cause and effect relationship is limited by the theory’s reliance on unobservable constructs. The firm’s capabilities and core competencies are difficult constructs to measure due to their intangible nature, and therefore research is constructed using proxy variables which affects the construct validity of the study (Hoskisson, Hitt, Wan & Yiu, 1999). Furthermore, there is no way to provide a concrete set of instructions within the theory in order to provide an organisation with a clear path to organisational performance, but rather provides a prompt for organisations to look internally for sources of competitive advantage, providing the definitions of what constitutes a human or physical capital asset, what should be considered a valuable, rare, inimitable or non-substitutable resource, and vague guidelines for how to utilise these uncovered resources. In this manner, it is more of a definition-based, foundational theory than a theory that can be operationalised into action.

Furthermore, the RBV and VRIO framework has limited prescriptive ability in real-world contexts due to some of the resources existing as set and unchangeable, and therefore not malleable for managers to exploit to gain competitive advantage (Priem & Butler, 2001). An example of such resources would be path dependent resources or resources born from social complexity.

Barney (2001) has also pointed to flaws within the rhetoric of the RBV, stating that due to causal ambiguity, managers may not be able to uncover which resource generates competitive advantage from the pool of resources they possess. This ties back to the intangible nature of some organisation’s capabilities and processes, and the unobservable nature of some of the firm’s characteristics. The lack of testable variables discussed within the theory expose a large gap within it, and also leaves the accompanying research in support of RBV open to criticism in relation to its validity and reliability.

Furthermore, the resource-based view of the firm’s lack of predictive ability and inability to identify resources and capabilities that will lead to competitive advantage is one of the most commonly discussed shortfalls of the theory (Hinterhuber, 2013). Bowman and Collier (2006) add to this line of thought, stating that the RBV literature lacks any meaningful prescriptions that practitioners can use to move their firms forward. In this manner, the RBV concept lacks a solid plan of action for HR professionals to implement in order to aid in increasing organisational performance.

Shin and Konrad (2014) also raised the question of how effective the RBV concept is in application, illustrating that the relationship between organisational performance and RBV human resource practices is in fact reciprocal in nature, with better organisational performance resulting in more investment in HR practices and systems. The RBV and VRIO framework fail to acknowledge this two-way relationship, which may lead to an overly internal focus without taking into consideration the effect that the firm performance has on the firm’s valuable resources, the same way that the firm’s valuable resources has a direct effect on the firm’s performance. In acknowledgement of this research, Barney, Wright and Ketchen (2001) state that although the RBV research has identified the effects of resources on outcomes, the research has made much less progress in describing how resources are developed in order to become sources of competitive advantage, and encourages organisational behaviour researches to fill this gap. With this acknowledgement in mind, it could be suggested that the resource-based view of the firm is a fundamental concept within the organisational performance and human resource management link, but one that acts as a foundation to serve developing, in-depth research that can be built upon this initial body of work. It is not presented as an all-encompassing theory that provides a causal link between HR systems and organisational performance but certainly sets the precedence for this link to be explored. Future researchers have many branches of research areas to choose to explore which the RBV has been pivotal in uncovering. Throughout the literature discussed within this essay, the question of how resources are developed through specific testable systems in order to achieve competitive advantage, the effect of contingency factors on organisational performance, and constructing testable variables to create empirical research in gauging organisational performance are all areas that further research would benefit from in the context of the link between RBV and organisational performance.

Wright, Dunford and Snell (2001) have further illustrated the need for an attempt to be made to assess the validity of the theory outlined in the research that HR practices are path dependent or causally ambiguous, and also whether they are truly difficult to imitate. They also point to the lack of research demonstrating that HR practices impact the skills or behaviours of employees, then connecting those skills or behaviours to measures of performance.

The future trends discussed do not discount the work that has already been done within the field to link human resource management to organisational performance, but rather illustrates the manner by which the link is still evolving, with the opportunity to explore these research areas in more detail through the use of more rigorous, longitudinal studies in order to clarify the link and strengthen the body of work in relation to this field. This would assist in gaining a more complex understanding of the multifaceted relationship between human resource management and organisational performance.

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