Gaining Competitive Advantage through Human Resource Management Practices

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Gaining Competitive Advantage
through Human Resource
Management Practices
Randall S. Schuler* and Ian C. MacMillan
Critical to a corporation's growth and prosperity is gaining and retaining competitive
advantage. Although corporations may pursue many paths to this end, one that is
frequently not recognized is capitalizing on superior human resource management.
Currently, many companies recognize the growing importance of their human resources,
but few are conceptualizing them in strategic terms-in ways to gain a competitive
advantage. As a result, many companies forego the opportunity to seize competitive
advantage through human resource practice initiatives. However, there are a few companies
that do not forego the opportunity. We use them as examples to show how to systematically
develop such advantages via a "target/thrust matrix." The end results of this matrix
have significant implications for both corporate strategy and personnel and human
resource management.
In an earlier article, MacMillan presented the concept of strategic ini-
tiative and defined it as the ability of a company or a strategic business
unit to capture control of strategic behavior in the industries in which
it competes (1983, p. 43). To the extent a company can gain the initiative,
competitors are obliged to respond and thus play a reactive rather than
a proactive role. Consequently, if it can gain a strategic advantage, a
company can control its own destiny, and, to the extent it can gain an
advantage difficult for competitors to remove, stay in control longer.
Thus the financial benefits of gaining competitive advantage are enormous!
MacMillan (1983) suggests that gaining a competitive advantage requires
an understanding and anticipation of response barriers, intelligence sys-
tems, preemption potentials, infrastructure requirements, calculated
sacrifices, general management challenges, and punch and counterpunch
planning. The purpose of this article is to expand upon his discussion
of the infrastructure requirements. In doing so, we will show how companies
can strategically utilize these infrastructure requirements to gain com-
petitive advantage, particularly through their human resources and human
resource management practices.
* To whom correspondence should be addressed: Graduate School of Business,
New York University, 90 Trinity Place, New York, NY 10006.
Human Resource Management, Fall 1984, Vol. 23, Number 3, Pp. 241-255
© 1984 by John Wiley & Sons, Inc.
CCC 0090-4848/84/030241-15$04.00

Defined here, infrastructure requirements consist of those functions
and activities necessary for the effective management of a company's
human resources. The major purposes of these activities traditionally
have been to attract, retain, and motivate employees. We refer to them
as human resource management (HRM) practices (Schuler, 1984), and
the key HRM practices include:
• Human resource planning
• Staffing, including recruitment, selection, and socialization
• Appraising
• Compensation
• Training and development
• Union-management relationships
The result of effectively managing human resources is an enhanced
ability to attract and retain qualified employees who are motivated to
perform, and the results of having the right employees motivated to
perform are numerous. They include greater profitability, low employee
turnover, high product quality, lower production costs, and more rapid
acceptance and implementation of corporate strategy. These results,
particularly if coupled with competitors who do not have the right people
motivated to perform, can create a number of competitive advantages
through human resource management practices. For example, according
to Glenn Bailey, Chairman of Bairnco Corporation, compensation tied
to performance is a powerful spur to management hustle. Under a system
where officers with a salary of $100,000 a year can make that much again
in bonuses linked to performance, the Kaydon bearing division of Baimco
has increased sales from $270 million in 1981 to $442 million in 1983.
Lincoln Electric is a leader in small motors and arc welders. Lincoln
has a compensation system tied to the company's profits. This system
has resulted in the average Lincoln worker making up to $44,000 a year.
In addition to the high motivation to produce, Lincoln workers rarely
quit. Their turnover rate is less than one percent.
Key to the success of the consulting group at the American Productivity
Center is its HRM practice of selection. By hiring generalists, members
of its consulting staff can "sell" any of the other specialty areas and also
be effective in the delivery of those specific services.
As Peters and Waterman (1982) point out, all the excellent organizations
surveyed made effective use of their human resources, and they did this
through their personnel and human resource management.
A further bonus for a company's ability to attract and retain key people
is its capacity to implement other critical corporate efforts and even ensure
its survival and profitability. The essence of this is captured quite nicely
by Walter Wriston's (outgoing Chairman and CEO of Citicorp) comment:
Human Resource Management, Fall 1984

I believe the only game in town is the personnel game ... My theory is if
you have the right person in the right place, you don't have to do anything
else. If you have the wrong person in the job, there's no management system
known to man that can save you.
Edson de Castro, president and founder of Data General, following up
on Wriston's advice, hired a team of professional managers to direct the
company, and thereby replace the previous leadership that excelled in
technical and entrepreneurial skills. De Castro's strategic change of human
resources appears to be thus far aiding the growth and profitability quite
nicely. Commodore International illustrates the impact of not having the
right people at the right time. In early 1984, Commodore's future was
put in jeopardy upon the departure of several high-ranking, high-skilled
managers. According to industry analysts these departures left Com-
modore without a clear product strategy for the future and cast doubt
on the future of the company.
An initial understanding of where companies can gain competitive
advantages through their HRM practices is facilitated by a discussion of
• Strategic targets
• Strategic thrusts
We shall briefly describe these via examples of companies that have gained
a competitive advantage through the various targets and thrusts. Exhibit
1 identifies major thrusts and targets. After the description of thrusts
and targets,, we show how specific HRM practices can be used to gain
a competitive advantage.
Exhibit 1.
Matrix of thrusts and targets.
Bell Labs
Schuler and MacMillan: Gaining Competitive Advantage / 243

There are four targets of FIRM practices that can be used for competitive
advantage. These four targets represent upstream and downstream ac=
tivities as well as the company itself. Accordingly, the four include: self
(the focal company); customers; distributorslservicers; and suppliers. Our
earlier examples illustrated uses of HRM practices only within a company.
Companies can reach backward or reach forward to help shape the HRM
practices of other companies. For instance; we find' companies like' Pepsico
training store managers (Pepsico's distributors) in'merchandizing tech-
niques'to help increase store sales as well as sales of Pepsico. Unifi helps
customers with their performance appraisal systems, making their cus-
tomers- more competitive and thus better able to buy Unifi products.
Mercedes has trained 'mechanics in service
(their servicers)
throughout the United States in order that Mercedes can offer 24-lour
servicing anywhere in the United States. Nissan Motors and HondA Mo-
tors offer extensive training programs to their parts suppliers in order to
enhance the quality of their products (both them as well as the suppliers).
McDonald's offers extensive training to their franchise owners (i e their
There are two strategic thrusts, or ways to beat the competition, through
human resource management practices. One is a costlef ficiencyt thrust. The
case of Lincoln Electric; is an example of the use of HRM practices to
increase the efficiency of production and thereby lower the cost of the
electric motors and arc welders. PEOPLExpress Airlines is a similar etc-
ample of, a cost/efficient thrust. Unifi, McDonald's, and Honda assist in
the HRM practices of their customers, distributors, and suppliers, :re-
spectively, in order to help them keep costs down as well- as to ensure
a competitive, and thus enduring, set of customers, distributors, and
The second thrust option is a differentiation thrust. The cost/efficient
thrust represents HRM practices that are used to improve the efficiency
of. product production_ and thus to lower the:e cost, of thepproduct. The
dfferentiation thrust uses HRM practices in ways to differentiate the
product or the company from its competitors. Although this may not
make them more efficient,, their farm system and promotion. policies help
differentiate the Baltimore Orioles from competitors in the eyes of its
supply; sources-young talented baseball. players. In a similar vein, for
decades Bell Labs attracted the cream of the crop of engineering Ph.D.'s
with a similar strategy. IBM was able to differentiate itself from competitors
As we
by providing programming training for customers' employees.
already mentioned, Pepsico-was able-to-differentiate itself from com-
244 / Human Resource,Management„ Fall 1984

petitors by providing merchandising training and store management
training to a fast growing distributor group-the medium-sized urban
supermarket. General Electric Power Systems division recognized that
its sale of large equipment contracts worldwide depended on a challenging
combination of traditional technical skills and radically new financing
skills, so they systematically staffed up to secure these skills and now
have differentiated themselves as producers of power systems, with af-
fordable financing options, in third world countries.
The target-thrust matrix we showed in Exhibit 1 provides the firm
seeking a competitive advantage with eight broad options from which
to launch a strategic advantage. The next question is to ask what particular
human resource practices the firm is exceptionally good at, and to see
where these skills can be applied in the target thrust matrix. This we
have done in Exhibit 2.
Increasingly, companies are being forced to link human resource plan-
ning with strategic business planning. Companies are taking note of recent
census data-those data indicate that the number of young workers in
the labor force peaked at 37 million in 1980 and will drop to 24 million
by 1990. Meanwhile, each year 2.3 million 17-year-olds are added to the
ranks of the functionally illiterate. Among Hispanic 17-year-olds, 56%
are functionally illiterate while 47% of the Black 17-year-olds are func-
tionally illiterate. In anticipation of a desperate need for literate young
workers at all levels, companies such as Texas Instruments and New
York Telephone are getting into secondary and primary education to
help increase the literacy rate in the reduced supply of labor force entrants
in the 1980s. Without such action, the very ability of some companies
to survive is in jeopardy. According to Robert Feagles (senior vice pres-
ident of Travelers Insurance Company), "The issue of functional illiteracy
has coiled at the center of our unemployment problems and it threatens
this country's ultimate ability to succeed in the world market" (Business
May 9, 1984, p. 81).
Another aspect of planning that companies are addressing is rather
opposite to the one already described. It is that of the baby boom bulge
(people aged 25-54) that is moving through the work force. This is creating
a rapid expansion of potential managers with a narrowing base of man-
agerial jobs. Added to this situation is the desire by many of those in
this age category to be promoted and be successful. Meanwhile these
changes are occurring in an environment that is becoming more turbulent
and more demanding of change by the organization.
The intersection of these events is producing a company need for flex-
ibility and current, up-to-date skills. Companies such as AT&T, Bank
America Corporation, Sun Company, and Eastman Kodak Company are
Schuler and MacMillan: Gaining Competitive Advantage / 245

Exhibit 2.
Matching. HRM practices with targets and thrusts.
HRM practice
Company example
Texas Instruments
New York Telephone
Sun Company
American Productivity Center
Data General.
Baltimore Orioles
Emery Air Freight.
Hewlett-Packard -
Dayton Hudson/Pepsico
McDonald's Corp. '"
Ford Motors
Self -
American Airline

trying to gain this flexibility and skill currency by offering attractive early
retirement packages for carefully selected groups of employees. Since it
seems as if all the current demographic, economic, and technological
trends will continue, it is reasonable to assume that the companies that
most systematically plan with their human resources in mind will be
most likely to gain a competitive advantage by having "the right people
at the right place at the right time" to produce quality products efficiently.
. Staffing
The American Productivity Center in Houston utilizes its staffing
practices to gain a competitive advantage. Furthermore it supports its
staffing practices with consistent training practices. According to Stu
Winby at the Center:
In hiring consultants we specifically look for the generalist; an individual
who has high propensity to learn other areas in the productivity domain; an
individual whose appreciation system and skills span both the qualitative and
quantitative aspects of productivity and organizational effectiveness. A value
of the organization is placed on organizational integration. We promote cross-
training and a multi-disciplinary approach to consulting engagements. The
competitive advantage is that most members of the consulting staff can "sell"
any of the other specialty areas but can also be reasonably effective in the
delivery of those specific services.
Against consulting firms that are more specialized and do not seem to have
this broad perspective emphasis on hiring generalists and promoting internal
integration among consultants has provided competitive advantage.
The Baltimore Orioles also attain differentiation through their staffing
practices, this time with their suppliers. Its farm clubs combine a selection
policy emphasizing internal promotion and support this with an extensive
training system (the farm clubs). Of these two HRM practices, it appears
as if the internal promotion is more critical to their overall success. The
result of both these practices, however, is a product that is clearly dif-
ferentiated from other teams in the industry: a consistency at winning,
yet retaining key employees at compensation levels far below many
competitors despite the lucrative bidding that goes on for top players.
In order for Data General to successfully implement its new structure
requiring professional managers rather than entrepreneurs, it has slowly
replaced many of its homegrown managers with more experienced ones
from outside. The results of this practice were mentioned earlier in this
article. To ensure the success of this staffing practice, Edson de Castro
and Hervert J. Richman, executive vice president, spent a vast amount
of personal time on hiring only those managers whose styles and interests
fit with Data General. The styles and interests that best seem to fit with
Data General now are those reflecting a desire for organization, long-
range strategic planning, and more stable and methodical growth patterns.
Schuler and MacMillan: Gaining Competitive Advantage / 247

This practice of careful selection to ensure a better fit between company
and employee is also a critical HRM practice at Goldman Sachs. There,
every partner interviews every MBA job applicant to ensure that the
new employees "fit" the company. :
Care in selecting to bring the right people on board leads naturally to
another important staffing practice: socialization. Socialization represents
the process used by companies to expose new employees to their culture
and ways of doing things. When done successfully, it results in intensely
loyal employees who are dedicated to the company. Companies that
have perfected the socialization process include IBM, Procter & Gamble,
and Morgan Guaranty Trust. Often the socialization process begins before
the employee is hired.
Procter & Gamble for example, an elite cadre
of line managers trained in interviewing skills probes applicants for entry
level positions in brand management for such qualities as the "ability
to turn out high volumes of excellent work." Only after successfully
completing at least two interviews and a test of general knowledge is
the applicant flown to P&G headquarters in Cincinnati, where (s)he
confronts a day-long series of interviews. If an applicant passes this
extensive screening process, (s)he is confronted with a series of rigorous
job experiences calculated to induce humility and openness to new
ways of doing things. Typically this phase of socialization involves long
hours of work at a pressure cooker pace. Throughout this phase and
others of the socialization process, the new employee is constantly made
aware of transcendentt company values and organizational folklore. Such
values and folklore include the emphasis on product quality and the
dedication and commitment of employees long since past.-
GTE performance appraisals are viewed as one of ~the most 4m,portant
tools in the management arsenal. According to GTE Chairman Theodore
F. Brophy, the GTE,appraisal system complements the emergent strategic
planning emphasis in all areas of the corporation. The appraisal reviews
assist executives in clarifying and articulating objectives and expectations
for themselves and their employees. They give GTE a realistic assessment
of its strengths, weaknesses, and future requirements:'. As such,. the
company is now able to better utilize its human resources :than pat any
time, in the past.
Another critical aspect of appraising is correcting poor performance.
At Emery Air Freight, the company was losing $1 million annually because
employees on the airport loading docks were shipping small packages
separately rather than placing those with the same destination in one
container that. would be carried at lower rates by air carriers. Management
also found that the containers.-were being used 45. percent of the time
when they should have been used 90 percent of the time.: -By establishing
248 / Human Resource Management, Fall 1984.

a program of positive consequences and feedback, the nearly $1 million
annual loss was eliminated. Stories of similar changes in poor performance
to good performance and large dollar savings resulting from absenteeism
reduction programs and employee assistance programs have been re-
ported by many companies. The result is a tremendous gain in cost re-
duction and improved efficiency.
In addition to PEOPLExpress Airline and Lincoln Electric, who use
compensation practices to gain a cost/efficiency competitive advantage,
TRW and the Hewlett-Packard Company use compensation to drive their
search for innovative products and services.
At Hewlett-Packard, entrepreneurial behavior is stimulated in project
leaders by tying more rewards to their success. Successful project leaders
are being given banquets, stock options, and personal computers. At
TRW, units or teams are given credit for sales generated in another de-
partment in return for helping that department. Consistent with the pre-
scription by Rosabeth Moss Kanter in The Change Masters, TRW fosters
innovation by stimulating interdependence through its compensation
practices. And these companies do get what they pay for-a steady stream
of product and service improvements and enhancements that help them
stand alone among their competitors.
Another company that has used compensation to gain a competitive
advantage is Nucor Corporation. It has simultaneously utilized four dif-
ferent group level incentive plans to increase its sales more than 6,000
percent and profits 1,500 percent in the past decade. At the equally suc-
cessful Chaparral Steel, all employees are covered by profit sharing.
Training and Development
When Delco-Remy trained its employees in participative management,
it succeeded in differentiating itself from all competitors in the eyes of
Honda and others. The success of this training and resultant competitive
advantage are described by Delco's Keith W. Wander:
Honda of America was seeking an American battery manufacturer as a supplier
to its auto plant in Marysville, Ohio. Honda wanted a plant which had a
participative system of management and a reputation for producing a quality
product at a competitive price. After a contact from the Delco-Remy Sales
Department, two American representatives from Honda visited the Delco-Remy
plant in Fitzgerald, Georgia. This visit was followed by a second one with Mr.
Hoshita, President of Honda, in the group.
During the second visit, plant tours were conducted by Operating Team
(hourly employees) members. The tours were followed by Operating Team
Schuler and MacMillan: Gaining Competitive Advantage / 249

members explaining to Mr. Hoshita how people were involved in the Fitzgerald
business, how Fitzgerald and Honda could be mutual resources to each other
because of their participative systems, and why a Delco battery was the best-
built battery in the world.
Mr. Hoshita returned several months later to ask more questions of the
Support Team (salaried employees) and Operating Teams. Shortly afterward,
Honda of America announced Delco-Remy, Fitzgerald, as its sole supplier of
batteries, based upon its (1) culture; (2) quality; and (3) price, in that order.
To date, Honda has had zero returns of batteries and zero complaints on
quality or delivery.
Dayton Hudson Corporation is using training and development skills
to create future customers. B. Dalton Bookseller Division has earmarked
$3 million over four years for a literacy training program-Their , goals
are to recruit volunteer tutors and to tell people without basic skills about
the free teaching programs available in their communities. As a part of
this, Dalton gives grants to local school districts to hire speakers who
will persuade teachers to put more emphasis on teaching reading skills.
Texas Instruments is engaged in, a similar program. While the result
of both the B. Dalton and TI programs is of immediate benefit to the
individuals gaining literacy, the companies broaden their base of potential
customers over the -longer run..
IBM has followed a similar strategy for manyy years in teaching pro-
gramming skills to customers' employees-capturing. unending loyalty
of the firms and the employees to IBM products.
McDonald's uses training to ensure its distributors of a competitive
advantage through cost/efficiency. McDonald's uses its intensive training
program at Hamburger University to ensure. that its franchisees or dis-
tributors run as efficiently as possible. Although training is also done in
order to attain consistent quality, its competitive advantage from training
is attained from a cost/efficiency thrust.
Union-Management Relationships
Critical to the success of many companies vis-a-vis competitors are their
labor costs. In many industries today, companies face possible bankruptcy
due to high labor costs. Helping to lower costs are wage reductions
reached between unions and management. Recently American Airlines,
Greyhound, McDonnell Douglas, Boeing, and Ingersoll-Rand have ne-
gotiated two-tiered wage systems to help reduce total costs by reducing
labor costs. Without these jointly negotiated systems, these companies
would not have survived.' Thus, a company's relationship with its union
can be critical to its survival, and the better its relationships are, the
more likely it is to ever gain a competitive advantage.
Crown Zellerbach Corporation and the International Woodworkers of
America demonstrated, however, that a competitive advantage can be
250 / Human Resource Management, Fall 1984

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