What is competitive advantage and how can HR help in creating it for the organization?

Introduction

In order to survive, prosper, sustain profitability and grow its market share an organization has to create for itself a competitive advantage that other organizations operating in the same market are not able to easily imitate. This is the ‘red ocean’ wisdom that will have to be adhered to by all firms operating in such a business environment.

How to create that competitive advantage? Definitely through producing what the customer wants and at the least possible cost. This is the only way to gain that advantage which is produced through the organization’s acquired resources (tangible and intangible) as well as the formulation and execution of an effective business strategy. Physical, technological, financial and human resources can be easily acquired on the open market, hence imitated. What is difficult to acquire or imitate are the specific management and HR practices that an organization can design, implement and incorporate into its culture. It is these specific management and HR practices that will give an organization its competitive advantage and consequently allow it to sustain its profitability. Jeffrey Pfeffer of Stanford University identified seven critical HR management practices in his book ‘The Human Equation’ (see diagram below). The purpose of this article is to highlight those best practices and show how they allow any organization, irrespective of industry or organizational setting, to build and maintain its competitive advantage.

Definition of Best Practices and Two Schools of Thought

HR management best practices are a set of HR management processes and actions that work universally. These practices are specifically designed by an organization and incorporated into its culture for the specific purposes of attracting, retaining, developing and engaging human resources in general and talent in particular. The ultimate purpose of these practices is to create a comparative advantage that is very difficult to imitate hence contributing to profit sustainability.

There are two schools of thought regarding the management of people in modern organizations:

The strategic HR school also referred to the best fit school which underlines the modern definition of HR management. The latter being the 'effective utilization of people in order to achieve the organization’s strategic objectives and the satisfaction of individual needs'. This school stipulates that for HR to add value, its strategy, policies and KPIs must be aligned with business strategy.

The best practices school calls for the establishment of a set of universal HR processes and activities that lead to the creation of competitive advantage and consequently to superior business performance. These practices and activities support the organization in reaching and maintaining its market competitive advantage regardless of the type of industry.

Both schools make perfect business sense and do not contradict each other at all. On the contrary, they complement each other. I believe HR management must strive to align its objectives and KPIs with organization’s mission and strategy on one hand, and to implement best HR management practices on the other. In fact, both schools combined make the essence of the modern notion of HR as business partner.

The below diagram summarizes the foundations of a people based strategy which includes the seven HR management practices identified by Pfeffer: the seven practices are very difficult to imitate on one hand and are capable of generating strategic performance results on the other hand. The combined result of both is the creation of market competitive advantage and the ability to sustain results over time.

A people based strategy can break the vicious circle that many organizations suffer from. The below diagram gives a clear idea of that vicious circle.

Starting with typical negative individual behaviors characterizing an organization, the resulting performance problems are numerous; low engagement, low productivity, low profitability, bad customer service and low stock prices. Typically, the organizational response will be as depicted in the third box exacerbating further down individual behaviors.

A people based strategy that includes the seven HR management practices can break the vicious circle of disengagement and performance.

The Seven Practices in Action

Providing Employment Security and Maintaining Employability

Although providing such security is becoming very difficult, nevertheless if an employer strives to enable the employee to provide for himself/herself and for his/her family in a continuous and stable way then the employee will put the effort in return for money and benefits. To compensate for their inability to provide employment security, many organizations resorted to increasing training and development budget not only to improve employees’ performance but also to maintain their employability and marketability in case of layoffs. Definitely, this first practice has allowed organizations to reduce overall employee turnover rate and retain their best people.

Selective Hiring; the Right People for the Right Jobs

Hiring for attitude rather than just for skill or education is primordial for ultimately hiring the right people. Research has shown that the difference in performance between an average performer and a high performance is 400%!! That is why organizations wishing to build a competitive advantage and sustain profitability cannot afford but hiring the best. To do that pre-employment assessment attempts to uncover three important employee characteristics:

1. Ability: does the candidate have the right technical and soft skills? Competency based interviewing is crucial in assessing ability.
2. Trainability: does the candidate have the aptitude to learn and keep developing?
3. Commitment: To what extent will the organization be able to retain this candidate as he or she becomes highly productive?

Self-Managed Teams/Effective and High Performing Teams

Team work is a prerequisite for high performance. Team members generate all sorts of different ideas and feel comfortable bringing up these ideas, discuss them and ultimately take the collective responsibility to implement them successfully. Through training as well as multiple tools, HR management can encourage teamwork and make it part of the organizational culture.

Extensive Training

One of the reasons why Singapore Airlines is one of the best airline companies in the world resides in the fact that the average number of training days per year per employee is 18 days whereas it is just an average of 5 days for US airlines. Training is not only crucial for increasing productivity but also for keeping employees abreast of rapid technological changes (believe it or not, the average lifespan of a technical skill is now around 18 months).

Soft skills are also very important. They are durable skills like leadership, collaboration, perseverance, embracing change, communication, problem solving, creativity, etc. These skills never get obsolete. One can take them anywhere inside the business and outside it.

The impact of these soft skills upon the business cannot be underestimated or overlooked. The proof is very clear; it takes the form of the core competency frameworks (behavioral competencies/soft skills) that the most successful companies have crafted for themselves over the last 30 years or so. These company specific core competencies are a common denominator among all highly successful businesses (Google, Microsoft, GE, Proctor & Gamble, Toyota, J.P. Morgan, Unilever etc.). They are derived from the companies' visions and strategic goals and are considered as 'critical success factors'.

HR can maximize the impact of training in general if the following four conditions are met:

• Design and develop technical and soft skill training programs that are linked to company's competency framework and strategic goals.
• Deliver interactive training with the objective of maximizing learning. This can be done through role playing, case studies and real life examples.
• Allow for failures in applying training lessons otherwise people will be worried to apply what they have learned. More specifically, make sure that whatever feedback about employee learning and development efforts is entirely separate from performance appraisals.
• Encourage managers and peers to coach and mentor individual trainees offering them continuous passionate and constructive feedback. This definitely plays a big role in improving or building soft skills. As a matter of fact, coaching is now considered as the primary tool for developing future leaders.

One has to remember that learning is becoming increasingly important for new Millennials and Generation Z who rate learning and personal growth as much more important compared to older generations.

Reduction of Status Differences and Information Sharing

Reducing status differences among employees and sharing information (open communication) send the message that every employee is a valuable member of the organization and will be treated as such. Such a practice reduces hear-say, rumors and gossip.

Moreover, this practice aims at involving everybody in the business hence increasing employee engagement and motivation.

High and Contingent Compensation

If the organization is hiring the right people, it will have to compensate them above average and link their total pay to their performance. This is done through various compensation plans such as profit sharing, stock option, shared ownership etc. A policy of rewards and recognition that is performance based is a strategic HR management practice.

The seven practices highlighted in the above diagram form the basis of good HR management. However, implementing them alone or separately from the rest of the business is not enough at all. The practices need to be introduced and managed in full alignment with what the rest of the organization is doing. This is very important to remember.

Now, what happens when HR management bundles these practices together and in alignment with the organization’s mission, goals, and objectives? The diagram tells it all. Performance results will be outstandingly high bringing financial results and sustaining them over time.

For any further discussion or questions please do not hesitate to get in touch; just send me an email on

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