Many corporate annual reports boldly state that the firm’s people are its most important asset in firm performance. However, when assessing the actions of these firms, it is sometimes evident that many organisations under-utilise HR processes and functions in achieving sustained competitive advantage. This article examines the importance of the HR function through the use of the value, rareness, imitability and organisation (VRIO) framework in order to provide executives with the tools necessary to decipher how they can manage the HR function to develop a firm’s people power as a source of sustainable competitive advantage.
The resources based view of competitive advantage is an economic theory that states that organisational resources are scarce, and it is how we use those resources that can lead to competitive advantage. There are three types of resources can provide competitive advantage: physical capital such as the plant, equipment and finances, organisational capital such as the organisational structure planning, controlling, coordinating and HR systems, and human capital, being the skills, judgement and intelligence of the firm’s employees.
For the purpose of this article, we will focus on human capital characteristics and how these can contribute to the organisation’s competitive advantage overall. In order to identify which human capital characteristics are of value to an organisation as well as to identify the role of the HR function in managing the human resources of the firm, a framework that provides four key questions should be implemented. This is the Value, Rareness, Imitability and Organisation (VRIO) framework. The framework poses these questions: is a resource valuable? Is the resource rare? Is it difficult to imitate? Is the resource supported by the organisation?
The first question: value.
Firms create value through either decreasing production costs or differentiating the product/service from competitors that allows the firm to charge a premium price. Managers and HR professionals need to address the ways in which the HR function can aid in either decreasing costs or increasing revenues. This may be through assessing areas where it is possible to decrease the costs associated with running the organisation’s employees, such as a program dedicated to increasing employee satisfaction in order to decrease employee turnover costs, or increasing revenue through focusing on efficiency and productivity practices or an organisational culture shift that focuses on customer satisfaction to indirectly aid in increasing returning customer numbers and revenue.
The value of an organisation’s human capital alone is not sufficient criteria for competitive advantage. If a relatively equal level of human capital performance is found in many competing firms, then the human resource capital cannot be viewed as a source of competitive advantage. A human resources professional must be able to uncover or develop, and then exploit rare characteristics of an organisation’s human capital in order to create sustained competitive advantage. This may be a rare dynamic or culture within certain production teams that leads to successful innovation or increased productivity, or a certain standard of excellence and training within all employees that is rare within the organisation’s industry.
The two points we have discussed up until now are two examples of human capital characteristics that can provide short term increased profitability, but is rarely sustained long-term due to the ability for other firms to imitate those characteristics once they catch on to their competitors operations. Therefore, management and HR executives must attempt to develop and nurture characteristics that cannot be easily imitated by competitors. An important part in the inimitable development process is focusing on socially complex phenomena that exists within each firm; a product of each organisation’s unique history and culture. Every company has a unique history that has the power to define the present situation. This unique history provides a foundation for competitive advantage, due to the inimitable nature of company history. The personality of a company, combined with a successful culture which is developed over time, is something that cannot be fabricated by competitors. An organisation may be able to meet you in cost, they may be able to meet you in quality of service that constitutes good value. But they cannot imitate the attitude and spirit of employees that manifests out of great culture. Something that is created from time and dynamic social processes is virtually impossible to imitate. Making it a perfect source of organisational competitive advantage.
Finally, the question of Organisation:
In order for any of the characteristics we have discussed to aide in sustained competitive advantage, the firm must be organised in a manner that encourages the exploitation of these resources. Specific systems and practices need to be set in motion in order for these human capital characteristics to come to fruition in the battle for competitive advantage. A supportive and encouraging culture, combined with organisational systems that support initiatives that are designed to increase productivity, revenues or better the organisation as a whole are vital. The organisation must focus on these systems and processes to maximise the exploitation of characteristics that aide in competitive advantage.
It is clearly evident that the HR function of a firm plays a vital role in achieving competitive advantage; by either directly controlling or indirectly influencing the characteristics that develop and maintain the advantage against competitors. In order for HR to ensure the continued success of their efforts, HR executives must focus their attention on activities and processes that nurture the characteristics fundamental to their sustained competitive advantage to ensure continued growth and development into the future.