HRD for Developing States & Companies

13. Creating Sustainable Competitive Advantage Through People and Culture

CREATING SUSTAINABLE COMPETITIVE ADVANTAGE 85 13 Creating Sustainable Competitive Advantage Through People and Culture Günter Stahl The objective of this paper is to provide a broad overview of current trends in HRM and leadership development, and to give participants an idea how some of the most successful companies manage their people and culture. What we can observe today in the most successful companies is a clear trend away from HRM as a mere cost function to driver of firm performance and sustainable competitive advantage. This trend goes hand in hand with a belief in the efficiency of so called “high performance” work systems or HRM practices. There is strong research evidence to suggest that highperforming companies adopt HRM practices different from those adopted by low-performing firms (e.g., study of U.S. companies conducted by Mark Huselid and colleagues such as The Workforce Scorecard: Managing Human Capital to Execute Strategy [Harvard Business School Press, 2005]). Based on this and related research, Jeff Pfeffer concluded that seven HRM practices are particularly effective in improving firm performance. 1) Highly selective hiring: e.g., Southwest Airlines in 1993 received 98,000 applications, interviewed 16,000 people, and eventually hired 2,700. Infosys last year (in 2004), despite the increasing competition for software engineers in India, received over one million applications, they tested around 130,000 candidates, and hired 10,000 — the top 1%, based on their assessment results. Companies can only be highly selective in hiring when they have a large applicant pool. And, these companies need efficient and validated selection processes.Also, Pfeffer found that some of the most successful companies focus on attitudes and cultural fit, rather than job-related skills, in the selection process. Kelleher, the former CEO of SWA, puts it this way: “If you don’t have 86 GÜNTER STAHL a good attitude, we don’t want you, no matter how skilled you are. We can change skill levels through training; we can’t change attitudes”. 2) Extensive training: Emphasis on training is a logical consequence of the fact that these companies focus on attitudes and cultural fit, rather than job-related skills, in the selection process. 3) Self-managed teams: Team-based organizations are more successful in having all of the employees feel accountable and responsible for the success of the firm. Teams also permit employees to pool their ideas to come up with better and more creative solutions to problems. 4) Reduction of status differences: Some of the most successful companies have reduced the gross wage differences between top managers and the rest of the employees. Some companies have practised this philosophy from day one. At SWA, for example, there are no company cars, no club memberships, and Herb Kelleher, former CEO of Southwest, was one of the lowest paid CEOs in the United States. 5) Employment security: Employment security is fundamental to implementation of most of the other high performance HRM practices, e.g., investment in training and development. Also, Pfeffer found that companies tend to lay off people too quickly at the first sign of financial difficulty. 6) Compensation contingent on performance: Employee stock ownership is an important part of the compensation and benefits systems of many of the most successful companies. The philosophy behind employee stock ownership plans is that “When employees are owners, they think and act like owners”. Unfortunately, there is little evidence that stock ownership, by itself, affects individual or firm performance. In order to be effective, stock ownership programmes have to be part of a broader philosophy of management that incorporates other practices, such as training and development, information sharing, and delegation of responsibility. 7) Information sharing: Most of the top-performing companies have developed and implemented comprehensive measurement systems such as the Balanced Scorecard (BSC) for communicating financial and non-financial information to employees. In addition to the direct positive effect of enhanced communication, information sharing on such things as financial performance, strategy, etc., conveys to employees that they are trusted by management and thus has a motivational effect. As an integrated system, not in isolation, these practices have a powerful impact on the performance of companies. At least, this is what studies of North-American companies have found, and there is CREATING SUSTAINABLE COMPETITIVE ADVANTAGE 87 also some evidence from outside the United States, mainly from Europe. But there are caveats. Contrary to what HRM scholars such as Pfeffer and Huselid propose...