• Competitive advantage: Looking in the wrong place

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  • 13 Jan 2011
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Being an HR executive is never easy. Just when you are about to applaud the cultural compatibility of a proposed merger, someone starts talking about “upstream synergies in the value chain”. Or you unveil an innovative executive training programme and boardroom colleagues question its net present value and ask how long it will take to pay dividends. Or there is a crisis and the company needs to cut costs, so your desk is their first stop, since surely training, recruitment and work-life balance programmes are easily expendable?

Such attitudes are common, but they are also evidence of startling business naivety. A company’s real, sustainable competitive advantage is almost always based on the softer, intangible parts that HR executives care about – and very seldom on the hard stuff that’s easier to capture in numbers, such as production capacity, cash reserves or even brand recognition.

The hard stuff is often also the easiest to imitate. Production capacity, stock and sales points are things money can buy. A skilled and motivated workforce, a company culture that draws commitment and loyalty, and effective informal networks and processes are much harder to emulate, no matter how much money you have.
In fact, the world of business is full of habits and beliefs that are taken for granted and rarely questioned. As an academic, I like to examine the research evidence about what actually happens in the real world of business – rather than what executives and consultants think should happen. Much of the evidence shows that HR practices do indeed have bottom line value. Here are a few of my favourite examples.

Downsizing (almost) never works. But good HR practices will be one of the success factors
Firms engage in downsizing to boost their profitability. But does it work? It has obvious advantages – waving the hatchet lowers headcount quite effectively and leaves you with lower staff costs. But there are some risky potential disadvantages, such as lower commitment and loyalty among the survivors. Academic studies indicate unwelcome rises in voluntary turnover rates after downsizing, often leaving a company leaner (and lamer) than intended.

Professors Charlie Trevor and Anthony Nyberg from the Wisconsin School of Business at the University of Wisconsin-Madison decided to examine who could get away with a downsizing programme or, put differently, what sort of companies did not suffer from a surge in voluntary turnover following a downsizing programme. The answer was clear: companies with a history of HR practices aimed at assuring procedural fairness and justice did not see their turnover rise after a downsizing effort.

These practices might include having confidential hotlines for problem resolution or an “ombudsman” designated to address employee complaints, and the existence of grievance or appeal processes for non-union employees, and so on. Companies with good work-life balance benefits – such as paid sabbaticals, on-site childcare, defined benefit plans, and flexible working patterns – also did much better. The surviving employees were more understanding of the company’s efforts, had higher commitment, and were confident that the downsizing effort had been fair and unavoidable.

So downsizing can work, but only if you have previously taken commitment to your people seriously.

The individual star never outweighs the organisational environment
Another myth that non-HR executives tend to harbour is that star employees can easily take their virtual Rolodex and join a competitor – where they will make them just as much money as they did for you.

This is a painful underestimation of the value of a well-designed organisation, and overplays the supposed portability of many star employees. Boris Groysberg, associate professor in the organisational behaviour unit at Harvard Business School, examined top-performing security analysts and what happened to their performance when they moved to another firm (for an even higher pay cheque); it pretty much always plummeted.

Even security analysts (who are often thought to be able to take their skills anywhere) were much more dependent on the specifics of the organisation in which they were embedded than they, and their employers, realised. Hence, careful, firm-specific HR practices help certain individuals to perform better – and they can’t just replicate that business in another company.

Losing a star performer can be a good thing – especially if they go to a client
Many top executives are as frightened of clients or customers poaching their top employees as they are of competitors’ advances. And, of course, losing your well-trained, top-performing employees is hardly ideal.

However, there is definitely a potential upside – as Deepak Somaya, a professor at the Robert H Smith School of Business, University of Maryland, discovered. He and colleagues from two other universities examined the movement of patent attorneys between 123 US law firms and 109 Fortune 500 companies from a variety of industries. And they found strong evidence that if a client company recruited a patent attorney from a law firm, that law firm would start to get significantly more business from that company.

Hence, your employees leaving for your clients can be a good thing: they may bring you valuable business. McKinsey understands and manages this process particularly well; when you leave McKinsey you automatically become an alumnus of the firm (rather than a deserter). The firm carefully nourishes its relationship with alumni, because they subsequently bring a large chunk of their business through the door.

Soft initiatives have tangible shareholder value
The final persistent myth that HR sceptics favour is that HR costs money and that shareholders do not appreciate all sorts of soft measures, such as work-life balance programmes. That used to be true in a bygone era, but no more.

For example, Michelle Arthur, an associate professor at the University of New Mexico, set out to examine stock-market reactions to the announcement of Fortune 500 firms adopting such work-family initiatives. The results were very clear. In the early 1980s, the stock market would hardly react at all to such “soft and fluffy” initiatives; if anything, the effect of the announcement on a firm’s share price was slightly negative (-0.35 per cent). However, that changed in the 1990s, when announcement of a work-family initiative caused an immediate rise in stock price by, on average, 0.48 per cent. That may seem peanuts at first sight, but if you are a £5 billion company, it implies that even one such initiative would immediately increase the value of your firm by £24 million.

So executives who question the (shareholder) value of work-life initiatives are simply stuck in the 1980s; nowadays even the stock market recognises their value.

Why isn’t this HR wisdom more widely accepted?
You may know the old story of the inebriated cyclist searching for his bicycle keys under a lamppost. “Did you drop them just here?” asks a passer-by. He replies: “No, but it is light here - I’d never be able to find them in the dark where I dropped them.” The story reminds me of the executive who is trying to solve a company crisis or gain a competitive advantage by managing the things that can easily be measured (production capacity, headcount, profit and loss). Those things may be easy to observe and influence but they are seldom the real root of the problem, nor do they really harness your competitive advantage.

To do that, you have to look where things are much more difficult to measure and manage – to the loyalty of your workforce, their motivation and job skills. Manage those things well and you are truly entering the light.

How to convince your colleagues

The next time that you are trying to convince your senior colleagues of the upside of investing in a training programme, bear in mind what Nobel prizewinner Daniel Kahneman and his colleague Amos Tversky found in their famous experiment about how to frame a proposal:

Imagine that the US is preparing for an outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programmes to combat the disease have been proposed.

Assume that the exact scientific estimates of the consequences of the programmes are as follows:
If programme A is adopted, 200 people will be saved. If programme B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no one will be saved.

Which one of the two options would you prefer? Kahneman and Tversky found that a substantial majority of people would choose programme A.

Then they gave another group of people the assignment, but with the following description of the (same) options:
If programme A is adopted, 400 people will die.

If programme B is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die.

They found that, in this case, a clear majority of respondents favoured B – although the programmes are exactly the same in both cases. So how come people’s preferences flipped?

The answer lies in what we call “framing effects”, which greatly affect people’s preferences and decisions. For instance, in the first case, programme A is described in terms of the certainty of surviving (which people like), but in the second case it is described in terms of the certainty of dying (which people don’t like at all). Therefore, people choose A when confronted with the first programme description, and B in the second case, although the programmes are the same in both situations.

So frame your proposal in terms of the upside potential of the programme that you are hoping to start. Their inclination to support your initiative may dramatically rise as the result of their invoked sense of enthusiasm and optimism.

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Comments (1)
  • A really in-depth and insightful article.

    Thank you!