Ch. 3: Adding value through people (guest lecture)

This guest lecture by an HR business partner of a large Dutch high-tech company (in cooperation with Prof. Van der Heijden) covers the core theory of Chapter 3 of the book: how HRM adds value through people. The topics are: what an HR department looks like and what the role of the HR business partner is, the resource-based view (RBV), the VRIO framework, inimitability, the HR value chain with the critical HR goals (cost-effectiveness, flexibility, legitimacy), and the distinction between intended, actual and perceived HR practices. The company is used as an example only.

1. The positioning of HR in an organization

The lecture builds up a picture of how HR is positioned in a large organization:

• 'The business': the line organization with a management team at the top, managers and their employees. This is where the products and services are made.
• The HR business partner (HR BP): an HR professional who is linked to a specific part of the business (in the example a scope of about 300 people) and works closely with the management team. The HR BP is the bridge between the business and the HR department.
• HR Centers of Expertise (CoEs): specialist HR teams, for example Compensation and Benefits, Learning and Development and Recruitment. They design policies, tools and processes for the whole organization.
• Together, HR BPs and CoEs form the HR department.

The lecturer illustrates the roles with the example of an employee, 'Emma':

• Emma applies for a job: the Recruitment CoE runs the process together with the hiring manager.
• Emma performs very well and gets a promotion: Compensation and Benefits provides the pay structure and the manager, supported by the HR BP, makes the decision.
• Emma and her manager want to talk about career opportunities: Learning and Development offers programmes; the manager and the HR BP guide the conversation.

Next to the HR department, the lecture shows the classic lists of Paauwe and Richardson (1997) that link HR activities to HR outcomes and performance:

The reasoning is: HR activities influence HR outcomes (attitudes and behaviours of employees), and these outcomes in turn influence organizational performance.

2. The resource-based view (RBV)

The practical logic moves from 'what are companies good at?' to 'how do we help with HR?'. The lecture uses a four-step exercise to build a recruitment strategy:

1. Competitive advantage: e.g., a high-tech product produced in low volumes.
2. Critical success factors: what must go right to realize this advantage? (e.g., top technical expertise, precision, innovation, collaboration across disciplines).
3. Employee attitudes and behaviours needed: e.g., curiosity, willingness to learn, quality focus, cooperation.
4. HR practices for recruitment: e.g., targeted recruitment of specialized engineers (networks, universities, international recruitment), selection on learning ability and teamwork, employer branding towards technical talent.

3. The VRIO framework

The framework is hierarchical: a resource only reaches the next level if it passes the previous question. For HRM, the key message is that people and HR systems can be a source of sustained competitive advantage only if they are valuable, rare, hard to imitate and embedded in an organization that supports and exploits them. Single HR practices (such as a training programme) are easy to copy; a coherent HR system with a specific culture and workforce is much harder to copy.

4. Inimitability: why resources are difficult to copy

Three mechanisms make resources difficult to imitate (Barney, 1991):

• Causal ambiguity: what led to what? It is unclear, even for insiders, exactly which combination of factors creates the success, so competitors do not know what to copy.
• Path dependency: how did we even get here? The resource is the result of a unique history, incidents and decisions over time. Example: the company was founded in 1984 as a joint venture of two firms with the mandate to commercialize a wafer stepper developed by one of them; this history cannot be repeated by a competitor.
• Social complexity: who made the difference? The resource depends on complex social relations, culture and specific people. Example: a leading engineer who was fascinated by the fact that lithography equipment brings together many disciplines (optics, mechatronics, electronics, software engineering, chemistry) and who deliberately worked across disciplines. Such a multidisciplinary culture is difficult to copy.

5. The HR value chain and critical HR goals

The central model of Chapter 3 is the HR value chain (a strategic HRM framework based on Boxall and Purcell, Paauwe, and Wright and Nishii):

1. Organization strategy leads to an HR strategy (and to other strategies: marketing, financial, etc.).
2. The HR strategy is translated into intended HR practices.
3. Intended practices become actual HR practices (as implemented).
4. Actual practices are experienced as perceived HR practices (by employees).
5. Perceived practices lead to HR outcomes (satisfaction, motivation, retention, presence, social climate, involvement, trust, loyalty/commitment).
6. HR outcomes contribute to critical HR goals: cost-effectiveness, flexibility and legitimacy.
7. Together with critical non-HR goals (from the other strategies), they contribute to the ultimate business goals: viability and sustained competitive advantage.

5a. Cost-effectiveness

Cost-effectiveness is about labour productivity: realizing the desired output with acceptable labour costs. It is the most 'economic' HR goal. In the lecture, a company that realizes very high output with a relatively small number of highly productive employees is used as an illustration of how labour productivity can be a critical HR goal.

5b. Flexibility: numerical, functional and mental

In the book, flexibility is also split into short-term flexibility (numerical and functional adjustment) and long-term flexibility or agility (the capability to adapt to changing environments over time).

5c. Legitimacy

Legitimacy (social legitimacy) is the acceptance of the organization and its employment practices by society and stakeholders: acting fairly, legally and in line with societal norms. Loss of legitimacy (e.g., protests by environmental groups against an oil company, or public scandals around executives) damages the organization's reputation, its attractiveness as employer and in the end its viability. HRM contributes to legitimacy through fair treatment, compliance with labour law and collective agreements, good relations with unions and works councils, and ethical behaviour.

6. Intended, actual and perceived HR practices (Wright and Nishii)

The lecturer illustrates the gaps with an appraisal tool:

• Intended (CoE): 'Let's make a great appraisal tool with all kinds of guiding questions for people that look like us!' The designers build it for people like themselves.
• Actual (line manager): 'Do I need to follow these questions during the conversation with my employee? Can I use my own brain?' The manager implements it differently or selectively.
• Perceived (employee): 'What are all these questions about career development and ambition? I just want to do my 9 to 5 and go home.' The employee experiences it as irrelevant or even negative.
• Role of the HR BP: 'Let's make sure my business leaders, employees and HR colleagues understand each other!' The HR BP connects the three stages and reduces the gaps.

Key insight: the line manager has a large influence on what employees actually perceive, because line managers implement the practices. The Centers of Expertise mainly shape the intended practices, and the HR BP acts as a linking pin. This is the answer to example exam question 2: line management, although not part of HR, has more influence on the perceived HR practices than the HR business partner.

Key take-aways

• HR departments consist of HR business partners (linked to the business) and Centers of Expertise (specialists); line managers carry out much of HRM.
• RBV: competitive advantage comes from inside; HR practices must fit the source of competitive advantage.
• VRIO: only valuable, rare, inimitable and organizationally supported resources give sustained competitive advantage.
• Inimitability comes from causal ambiguity, path dependency and social complexity.
• HR value chain: strategy, HR strategy, intended, actual and perceived practices, HR outcomes, critical HR goals (cost-effectiveness, flexibility, legitimacy), ultimate business goals (viability, sustained competitive advantage).
• Flexibility can be numerical, functional and mental.