HOW LEVERAGING HUMAN RESOURCE CAPITAL WITH ITS COMPETITIVE DISTINCTIVENESS ENHANCES THE PERFORMANCE OF COMMERCIAL AND PUBLIC

ORGANIZATIONS
ABRAHAM CARMELI AND JOHN SCHAUBROECK
Although scholars agree that complex relationships between organizations actual human resources (i.e., human capital stock) and means of leveraging these resources may influence performance, little empirical work has tested such propositions directly. We collected two primary data sets from privateand public-sector organizations in Israel. The multiplicative interaction between perceived human resources capital and distinctive value derived from that HR capital was significantly related to various measures of perceived and objective organizational performance. Having higher levels of human resources capital was strongly associated with performance only when top managers perceived that these resources provided distinctive value in terms of being highly valuable, inimitable, rare, and nonsubstitutable. We discuss the implications of these findings for research on strategic human resource management and the resource-based view of competitive advantage, as well as for practical efforts to develop firm-specific human resource capital that is inherently distinctive. 2005 Wiley Periodicals, Inc.

Introduction

n the present era, capital is relatively accessible and organizations are pressing the limits of technological means to enhance productivity. Tangible resources that were once competitive advantages for their possessors are now imperatives to remain in business. Intangible resources such as HR capital appear to be the new keys

to competitive advantage. Developing HR capital that is in harmony with the organizations design and strategy is becoming, by many reasoned accounts, the cornerstone of competitive advantage (Pfeffer, 1994, 1998). Human resource practices can be a source of competitive advantage, but unique practices themselves are not the main goal of strategic human resource management (SHRM). Rather, the aim is to generate a comprehen-

Correspondence to: Abraham Carmeli, PhD, Graduate School of Business Administration & Department of Political Science, Bar-Ilan University, Ramat Gan 52900, Israel, Tel: +972-3-5318917, carmelia@mail.biu.ac.il
Human Resource Management, Winter 2005, Vol. 44, No. 4, Pp. 391412 2005 Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/hrm.20081

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sive, high-quality stock of HR capital and leverage it in such a way that it enhances organizational processes and outcomes. As summarized by Wright, Dunford, and Snell (2001), the resource-based view (RBV) of competitive strategy (Barney, 1991; Wernerfelt, 1984) has become by far, the theory most often used within SHRM, both in the development of theory and the rationale for empirical research (p. 703). However, scholars continue to raise serious questions regarding its standing within strategic management. A key issue has concerned the models testability. Some even have argued that the RBV is a tautology (Powell, 2001; Priem & Butler, 2001). Organizations with Much of the criticism of the theory stems from the indirect and superior resources often superficial manner by are expected to which it is tested. According to Barney (2001), studies have used build competitive the RBV to establish the context of some empirical researchfor advantages that example that the focus is on the enable them to performance implications of some internal attribute of a firmand outperform their are not really direct tests of the theory developed in the 1991 artirivals. cle (p. 46). Notwithstanding the theoretical and empirical sophistication of any given study, a common shortcoming among studies of competitive advantage, even those not testing the RBV, is that competitive advantage is inferred from the presence of substantial resources and/or high performance rather than direct measurement. This inference is problematic because the RBV distinguishes competitive advantages from these other concepts (see Peteraf & Barney, 2003). After reviewing the theory behind the application of RBV to human resource management, Wright et al. (2001) observed: While this theoretical story is appealing, it is important to note that ultimately, most of the empirical studies assess only two variables, HR practices and performance . . . a major step forward for the SHRM literature will be to

move beyond simply the application of RBV logic to HR issues toward research that directly tests the RBVs core concepts. (pp. 708709) We present two studies that directly test the RBVs core concepts by distinguishing HR capital, its perceived distinctive value, and organizational performance.

Theoretical Background and Hypotheses

The RBV has had much influence on the SHRM perspective (for reviews, see Ferris, Hochwarter, Buckley, Harrell-Cook, & Frink, 1999; Wright & McMahan, 1992; Wright, McMahan, & McWilliams, 1994; Wright et al., 2001). The RBVs concepts and principles can be traced to early studies in the field of strategic management (for a review, see Hoskisson, Hitt, Wan, & Yiu 1999). According to the RBV, organizations possess different bundles of resources (Wernerfelt, 1984). The heterogeneity of their resources accounts for variations in the competitive advantage of particular organizations and, hence, their long-term performance. Organizations with superior resources are expected to build competitive advantages that enable them to outperform their rivals (Peteraf, 1993). The RBV posits that highly valuable competencies serve to complement other important factors, and they have the potential to enhance productivity. Rare competencies are possessed by few, if any, major rivals and are not readily available in the market. Value and rareness have the potential to produce competitive advantage. Competencies are inimitable because they are costly for competitors to copy (Barney, 1991). The firm-specific nature of competencies, embedded in the way they interact with other core elements, makes their duplication by competitors very costly and complex. Nonsubstitutability refers to the inability of other organizations to readily substitute for the competency by using other resources without incurring high replacement costs (Lado & Wilson, 1994, p. 705). Competencies that are highly valuable, rare, inimitable, and non-

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substitutable are predicted by the RBV to result in a sustainable competitive advantage (Barney, 1991). An organization can potentially derive a core competence from its stock of HR capital. The stock of HR capital is the domain of potential core competence that is of interest to our research. Core competencies refer to the particular skills and resources an organization possesses and the superior way in which they are used (Reed & DeFillippi, 1990, p. 90). That is, core competencies are areas of competitive proficiency and excellence that are not relinquished by emerging competition and that distinguish the organization strategically from its competitors (LeonardBarton, 1992). Unlike other important organizational resources (e.g., information technology and human resource practices), HR capital is a potential domain in which valuable idiosyncratic characteristics can be derived (Barney, 1991; Winter, 1988). As noted by Lado and Wilson (1994), firm-specific human capital enhances the productive capacity of human resources; it is not widely available in the external labor market; and a viable substitute is not available without incurring high costs. The potential inimitability and value of HR capital stock may be understood by considering its relationship with organization strategy and the broader organization design. Such synergetic relationships create a complex system that is imperfectly imitable (Rivkin, 2000; Siggelkow, 2002). A particular stock of human capital is valuable only if it is aligned with design and strategy, meaning that the attributes of the workforce mutually reinforce the organizations culture, structure, and strategy (see Wright, Smart, & McMahan, 1995). As stated by Delery and Shaw (2001), A high KSA [knowledge, skills, and abilities] work force might not necessarily be a high productivity work force [i.e., a competitive advantage], if that work force is not highly motivated or is not given the necessary freedom and resources to do their jobs (p. 175). Thus, management practices can leverage HR capital by developing it in ways that are uniquely suited to the particular organizations design and strategy.

No matter how impressive an organizations stock of human capital may appear to external observers, judging its value and inimitability is possible only if one understands the complex and often subtle means by which these resources leverage other elements of the design and strategic direction of the organization. Thus, from an external perspective, the relationship between an organizations workforce and its success is more causally ambiguous than it is to the internal architects of the design and strategy. The competitive advantage inherent in an organizations HRM capital therefore may best be gauged by soliciting the assessments of individuals who can most accurately Management evaluate the extent to which that resource effectively leverages the practices can organization design and strategy. For example, Lepak and Snell leverage HR capital (2002) measured the distinctiveby developing it in ness of HR capital by querying managers about the uniqueness ways that are (rareness, inimitability, nonsubstiuniquely suited to tutability) and value of individuals skills in particular employthe particular ment modes (e.g., temporary work) within their organizations. organizations When describing superior HR capital, scholars refer mostly to the design and strategy. levels and types of education, knowledge, skills, ideas, and experience (e.g., Farjoun, 1994; Hitt, Bierman, Shimizu, & Kochhar, 2001).

HR Capital, Distinctive Value, and Performance

Hereafter, in lieu of sustainable competitive advantage, we use the label distinctive value to reference top managers perspectives on the rareness, uniqueness, inimitability, and nonsubstitutability of HR capital and other intangible resources in their own organizations. That is, distinctive HR capital is defined as the unique, costly-to-copy, and nonsubstitutable set of HR skills, knowledge, experience, and abilities that is specific to and controlled by a particular organization. Whether such characteristics ultimately provide a sustainable competitive advantage is a

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challenging empirical question that only can be addressed in the longer term and with substantial experimental control. An organization may have strong HR capital even though it has not yet developed a distinctive value for this capital because it has not effectively leveraged its design with its human resources. Likewise, a superior HR system design may not prove effective until the design strengths succeed in acquiring a high-quality stock of human capital through recruitment, selection, socialization, training and development, and other HR levers. Thus, we suggest that organizations can expect to reap performance benefits only when A strong stock of strong HR capital is combined with a distinct value gained from human capital is how this capital is utilized. As suggested by Boxall and Steennecessary for eveld (1999), Human resource advantages should be greater . . . above-normal to the extent firms exploit the poperformance, but it tential of outstanding human capital through superior manageis not sufficient. ment processes which facilitate such valuable routines as [examples of processes they observed in a particular professional industry] (p. 460). In summary, a strong stock of human capital is necessary for above-normal performance, but it is not sufficient. Given a strong HR capital stock, the organization also must effectively leverage it against the design and strategic orientation of the organization. We suggest the following hypothesis concerning the interaction between these variables in predicting performance: Hypothesis 1. There will be a significant interaction between HR capital and the distinctive value of HR capital in predicting organizational performance; the positive relationship between HR capital and organizational performance will be stronger when the distinctive value of HR capital is high.

independent variables, and organizational performance. Many researchers have argued that they were theoretically grounded in the RBV, and yet their empirical focus was on the main effects of a resource variable, such as HR practices, on performance (see Wright et al.s [2001] review). Other studies have examined the moderating effects of type of business strategy (Hitt et al., 2001; Khatri, 2000; Koch & McGrath, 1996) and degree of employee involvement in decision making (e.g., Wright, McCormick, Sherman, & McMahon, 1999) on the relationships between HR capital and organizational financial performance. Because the different subsample effects can be logically attributed to the theoretical processes, these studies have helped to advance the notion that the posited resource variable(s) are plausible causes of performance. Our review of the literature identified only one study, King and Zeithaml (2001), that explicitly tested the interaction between resource competencies and distinctive value as formulated within the RBV. In a very rich study that involved in-depth interviews of multiple informants from 17 organizations, results largely supported their model. We tested whether these constructs interact in predicting a wide range of performance indexes in the manner formulated by the RBV among a larger number of business organizations. We then attempted to replicate the findings, which were revealed in the study of business organizations, using a sample from the public sector.

Private-Sector Analysis (Study 1)

Method
Sample and Procedures A stratified random sample of Israeli organizations was drawn from Israeli commercial companies listed in Duns Guide to Israels Top 15,000 Businesses (1998 edition). The sampling frame was stratified by industry and company size. The sampling frame included both publicly traded and private companies. Although testing the RBV within a single in-

Generalizability of the Model

A review of the literature located 14 studies focused explicitly on the RBV, HRM-related

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dustry has several advantages (Dess, Ireland, & Hitt, 1990, p. 13), we sought to increase the potential generalizability of our findings by targeting a diverse sample of firms. Only a few empirical investigations (e.g., Robins & Wiersema, 1995) have studied companies from a variety of industries. A questionnaire was mailed to the chief executive officer (CEO) or the president of the organization and returned to a university address using a self-addressed reply envelope. In a cover letter, we asked the CEOs/presidents to ask their senior executives to complete the survey if they were unable to do so. One hundred and sixty-six surveys were returned, yielding a response rate of 20.7%. Nine questionnaires were excluded from the analysis due to substantial missing data. The mean age of the organizations was 23.79 years (standard deviation = 16.71), and their mean size, measured by number of employees, was 243.10 (standard deviation = 809.46). Among the respondents, 5.9% were female, 81.1% were CEOs (others held the position of vice-presidents), 91.5% held at least a graduate degree, the mean age was 48.06 (standard deviation = 7.70), and the mean organizational tenure was 5.98 years (standard deviation = 4.90).

their organizations performance relative to the performance of all competitors during the current and previous year. Each item was assessed on a five-point scale (1 = much worse than competitors, 2 = worse than competitors, 3 = as good as competitors, 4 = better than competitors, and 5 = much better than competitors). Independent Variables HR capital. This measure was indexed according to perceived levels of education, training, work experience, and skills of the entire employee membership of the organization. The mean age of the The four items ( = .81) were: (1) Our employees have suitable edorganizations was ucation for accomplishing their jobs successfully; (2) Our em- 23.79 years, and their ployees are well trained to accommean size, plish their jobs successfully; (3) Our employees hold suitable measured by number work experience for accomplishof employees, was ing their jobs successfully; and (4) Our employees are well 243.10 skilled professionally to accomplish their jobs successfully. Distinctive value of HR capital. This measure was assessed by querying leaders about four conditions that Barney (1991) asserts must be met for a resource to generate sustained competitive advantage. These conditions occur when the HR competencies have value, and are rare, inimitable, and nonsubstitutable. Lepak and Snell (2002) used a similar index to measure value and uniqueness of human capital. Respondents were asked to assess the HR capital according to these four criteria, using a separate item for each of the four dimensions ( = .81). These items were each rated on a nine-point continuum. The structure and the content of these items are provided in Appendix A. Control variables. The analyses controlled for technological environment and organizational size. In order to control for extraneous variance introduced by combining industries with differing technological environments,

Measures
Dependent Variables Organizational performance. Organizational performance was measured using the following single item indexes: (1) overall financial performancea measure that represents the overall financial soundness of the organization relative to its competitors, (2) return on equity (ROE)the ratio of net profit to the average of beginning and year-end equity; (3) quality of the organizations products/ servicesa measure that represents the degree of the quality of the organizations products and/or services relative to its competitors, and (4) customer satisfactiona measure that reflects the degree to which the organization fulfills the customers needs compared with its competitors. Corporate leaders were asked to use these criteria to rate

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we categorized companies into three industrial groups: high-tech, mid-tech, and lowtech. The high-tech group included biotechnology and pharmaceuticals, the mid-tech group contained plastics and electronics commerce, and the low-tech group included food and steel. The high-tech subsample was composed of 51 organizations, and there were 33 and 74 organizations in the mid-tech and low-tech groups, respectively. Technological environment was represented in the analyses using an interval variable coded with values of 0 (low-tech), 1 (mid-tech), and 2 (high-tech).1 Two researchers familiar with the Israeli businesses independently coded each company. They agreed on 83% of the coding. The remaining disagreements were

resolved through discussion. Size was measured as the number of employees in each organization as reported in the Dun guidebook.

Results
Based on factor analysis results, we averaged the variables to form a composite index labeled Financial Performance; quality of the organizations products/services and customer satisfaction also were averaged to form a composite labeled Service Performance.2 The HR capital and HR capital-DV variables were mean-centered, as is suggested for variables that are to be constituents of product terms (Aiken & West, 1991). To test Hypothesis 1, we first entered the control vari-

TABLE

Principal Component Analysis with Varimax Rotation

Private-Sector Analysis (Study 1): Item Educated employees Experienced employees Trained employees Skilled employees HR value HR rareness HR inimitability HR nonsubstitutability Valid N = 157 Public-Sector Analysis (Study 2): Educated employees Experienced employees Trained employees Skilled employees HR value HR rareness HR inimitability HR nonsubstitutability Valid N = 106

HR Capital 0.90 0.84 0.81 0.60 0.03 0.02 0.17 0.05

HR Capital-DV 0.04 0.05 0.03 0.03 0.85 0.84 0.75 0.75

0.83 0.90 0.87 0.85 0.10 0.23 0.03 0.23

0.22 0.14 0.19 0.19 0.63 0.70 0.73 0.51

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TABLE
Variable

II

Study 1 Means, Standard Deviations (SD), Alpha Reliabilities, and Correlations

Mean 3.78 3.78 3.78 6.55 0.02 248.5 SD .61 .56 .57 1.72 0.87 821.6 1 (.70) .11 .01 .01 .14 .17 (.72) .33 .13 .14 .07 (.81) .01 .14 .12 (.80) .13 .04 .03 2 3 4 5 6

1. Financial Performance 2. Service Performance 3. HR Capital 4. HR Capital-Distinctive Value 5. Technological Environment 6. Organizational Size
N = 157.

Critical value of r for all variables = .17 (p < .05; two-tailed test). Alpha reliabilities are in parentheses.

ables of organizational size and technological environment (see Table III). HR capital and HR capital-DV were entered at the second step. HR Capital was significantly related to service performance (p < .001), but it was not related to financial performance. HR capital-DV was not significantly related to either performance index. The HR capital X HR capital-DV product term variable was entered at the next step.

For both performance outcomes, the product term effect was significant and positive in sign. The product variable explained 3% of the variance in both financial performance and service performance. As shown in Figures 1 and 2, among organizations that reported low HR capital-DV, the perceived quality of the organizations stock of HR Capital had virtually no relationship with service performance and it had a negative re-

TABLE

III

Study 1 Results of Hierarchical Regression Analysis: Effects of HR Capital and HR Capital-DV

Financial Performance Step 1 Step 2 Step 3 .14* .16* .15 .17* .07 .01 .17* .15* .09 .01 .16* Service Performance Step 1 Step 2 Step 3 .13 .07 .17* .04 .35*** .13 .15* .02 .33** .12 .17*

Variable Technological Environment Organization Size HR Capital HR Capital (DV) HR Capital HR Capital DV

R2
R2

.05 .05 3.89* 2, 153

.05 .00 .43 4, 151

.08 .03 4.23* 5, 150

.02

.16 .14

.19 .03 5.71* 5, 152

F for R2 Degrees of freedom

DV = distinctive value. * p < .05, ** p < .01, *** p < .001.

1.92 2, 155

12.43* 4, 153

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FIGURE 1. Interaction Between HR Capital and Distinctiveness in HR Predicting Service Performance (Private-Sector Analysis)

lationship with financial performance. Among organizations that reported low HR capital-DV, HR capital was positively associated with the performance measures. These patterns indicate that Hypothesis 1 was supported for both outcomes.

Public-Sector Analysis (Study 2)

The second study was conducted slightly more than one year after Study 1. In Study 2, we sought to test the generalizability of the hypothesized model to a distinct population of organizations seldom addressed in studies of competitive advantage. Specifically, the study investigated whether HR capital and distinctive value of HR capital are also of im-

portance to public-sector organizations, and whether these variables interact as hypothesized in the first study. Although it is not widely portrayed in the media, local-level governmental authorities are in competition with one another. Economic competition among local governmental authorities (e.g., counties and municipalities in the United States, prefectures in Japan), hereafter labeled local authorities, is driven by the desire to increase revenues and decrease costs in order to enable more policy options. To generate additional revenue, local authorities seek to attract businesses or development projects and residents with high socioeconomic status. Intergovernmental competition is reflected by a

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FIGURE 2. Interaction Between HR Capital and Distinctiveness in HR Financial Performance (Private-Sector Analysis)

growing use of incentives, such as tax breaks and public financing of private projects. Israels local authorities are not significantly different in operation, strategy, or administration from their American counterparts and those elsewhere in the world. The competition among local governments pressures their political leaders to deliver higher-value services to the public (see Carmeli & Tishler, 2004b). Hecht (2002) provided evidence about the increasing competition and other sources of environment uncertainty among Israels local authorities. He also described how local authorities varied significantly in their quality of human capital, and he showed that their leaders have accordingly initiated significant organizational changes using the private sector as a model for change in response to increasing uncertainty. Muldrow, Buckley, and Schay (2002)

described how public-sector managers in the United States face a similar dynamic of change that demands more astute management of human capital.

Method
Sample and Procedures The target population consisted of 263 local authorities in Israel. The Israeli municipal structure is organized into three legal statuses that define forms of local authorities: municipality (city), local council, and regional council. Municipalities and local councils have similar traits and power. Both have responsibility for one smaller settlement, but the local councils tend to have a smaller jurisdiction than municipalities. Regional councils have responsibility for more

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than one settlement. One hundred and twelve local authorities participated, representing an overall response rate of 42.6%. Of the target population, 24 (of 53 in the nation45.3%) were regional councils, 63 (of 148 in the nation42.6%) were local councils, and 25 (of 62 in the nation40.3%) were municipalities. Six localities were excluded from the analyses due to missing data on one or more of the analysis variables, and thus the final sample included 106 organizations. The average size of the local authorities was 20,735 residents. Control variables were size (number of residents), locality statuses (municipality, local or reWe used several gional council), and financial performance variables obtained from measures to reports of the Israel Central Bureau of Statistics, using data of the evaluate the Social Science Data Archive (SSDA) of the Hebrew University performance of the of Jerusalem, and from an Israel local government government report (Ministry of the Interior, 2001). We collected authorities. original survey data for the remaining variables by mailing surveys to the elected heads (mayors) of the local authorities. These surveys were returned to a university address, using a self-addressed reply envelope. These variables are HR capital, HR capital-DV, and organization performance in education, welfare, and emergency services. Respondents were assured their responses would remain anonymous and confidential. Measures We used several measures to evaluate the performance of the local government authorities. These measures (financial performance, educational, welfare, and emergency services) reflect key criteria upon which local government authorities are evaluated. Financial performance was measured using the following variables collected and reported by the Ministry of the Interior (2001): 1. Self-income ratio: This is the ratio between all the income generated through

activities of the authority and the overall income of the regular budget. Self-income consists of all the income (taxes, grants, and fees) that the local authority directly collects from the residents, businesses, and other assets within its jurisdiction. Income of the regular budget consists of property taxes, fees, surcharges, general grants, finances from ministries, and single sources of income (Carmeli, 2002; Hecht, 1997). Our sample mean self-income ratio of 44.6% approximated the entire population of local authorities in Israel that year (41.9%). 2. Collecting efficiency ratio: This is the ratio between the total amount of funds collected and the total amount of municipal tax that could be collected. The funds collected consist of property tax, water, and drainage charges. The total amount of funds remaining after collection consists of accumulated debt from earlier years, and the current year debt minus exemptions, discounts, and the cancellation of self-incomes (Carmeli, 2002; Hecht, 1997). Our sample mean collecting efficiency ratio was 59.2%, which closely matches the entire populations mean of 58.0%. These latter two indexes provide a strong representation of the overall financial performance of Israels local authorities (see Carmeli, 2002). The education services measure included eight items ( = .91) representing the quality of the education within a local authority. A sample item is rate of students quitting before completing a twelve-year education. Welfare services was measured with four items (a = .89) evaluating the municipal welfare service system. A sample item is care for poor residents. Emergency services consisted of three items ( = .71) assessing the service in cases of emergency. Respondents rated items for each of the latter three variables over the past and current year, using a fivepoint scale: 1 = much worse than competitors (other local government authorities), 2 = worse than competitors, 3 = as good as com-

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petitors, 4 = better than competitors, and 5 = much better than competitors. We used the same scales as those used in the private-sector analysis (Study 1) to measure HR capital ( = .90) and distinctive value of HR capital (HR Capital-DV; = .72). The HR capital-DV items used a five-point (versus nine-point) interval scale for this study, however. The analyses controlled for size (number of permanent residents) and the locality status (municipality, local council, and regional council). The number of residents better indexes the scale of operations of a local authority than employee membership size (Razin, 1999). Locality type was indexed by an effect-coded (Cohen & Cohen, 1983) variable. Local councils were coded 1, and the municipalities and regional councils were coded as 0 and +1, respectively.

Results
Based on factor analysis results,3 collecting efficiency ratio and self-income ratio were averaged to form a composite index labeled Financial Performance. The number of permanent residents (size of the community) correlated positively and significantly with financial performance (p < .05), but not the other performance indexes (see Table V). This finding is consistent with results of pre-

vious studies showing that, compared to smaller public authorities in Israel; larger local authorities have better financial standing (e.g., Razin, 1999). We first entered the control variables of size and type of local authority (see Table V). These control variables explained between 2% (welfare service performance) and 6% (financial performance) of the variance in performance outcomes. HR-capital and HR capital-DV were entered at the next step. HR-capital was significantly related to all four performance indexes (p < .01 to .001). As in the private-sector analysis (Study 1), the HR capital and HR capital-DV variables were mean-centered. The HR capital X HR capital-DV product term variable was entered at the second step to test Hypothesis 1. For three of the four performance outcomes, the product term effect was significant and positive in sign. The significant product term effects ranged in magnitude from explaining an additional 3% of the variance in financial performance (p < .05) to an additional 8% of the variance in emergency service performance (p < .001). Welfare service performance was the only index for which the product term effect was not statistically significant (p < .17). The cut values for the high and low states on the moderator variable (HR capital-DV)

TABLE
Variable

IV

Study 2 Means, Standard Deviations (SD), Alpha Reliabilities, and Correlations

Mean 0.00 3.54 3.48 3.22 3.46 3.56 0.36 20356 SD .89 .79 .80 .81 .71 .64 .81 39634 1 (.76) .57 .40 .45 .23 .17 .15 .20 (.91) .49 .56 .50 .27 .16 .11 (.89) .49 .27 .10 .10 .08 (.71) .42 .25 .06 .06 (.90) .42 .07 .11 (.72) .15 .03 .25 2 3 4 5 6 7 8

1. Financial Performance 2. Education Service 3. Welfare Service 4. Emergency Service 5. HR Capital 6. HR Capital-DV 7. Type of Local Authority 8. Size (No. Residents)
N = 106; DV = distinctive value.

Critical value of r = .20, (p < .05; two-tailed test).

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TABLE

Study 2 Results of Hierarchical Regression Analysis: Effects of HR Capital and HR Capital-DV#

Financial Performance Step 1 Step 2 Step 3 Step 1 Step 2 Step 3 Step 1 Step 2 Step 3

Education Service Performance Step 1

Welfare Service Performance

Emergency Service Performance Step 2 Step 3

Variable

HUMAN RESOURCE MANAGEMENT, Winter 2005

Type of Local Authority .11 .22** .06 .19* .40** .03 .06 .02 .30** .52*** .63*** .33** .05 .08 .08 .00 .00 .00 .00 .00

.18

.20*

.19*

.18

.13

.13

.12

.11

.11 .00 .40** .08 .26

.06 .00

.02 .00 .46*** .09

.20 00 .61*** .04 .55***

Size (Residents)

HR Capital

HR Capital-DV

HR Capital HR Capital-DV

R2
.06 .06 3.24* 2, 104 4, 102 5, 101 2, 102 2, 100 3.88* 3.80* 1.68 .06 .03 .03 .24 .05 .12 .15 .03 .27 .32

.02 .02 1.06

.10 .08 4.16*

.11 .02 1.98

.03 .03 1.55

.23 .19

.29 .08 12.34*** 11.42***

R 2

F for R

16.66*** 6.58** 1, 99

Degrees of freedom

2, 102

2, 100

1, 99

2, 102

2, 100

1, 99

DV = distinctive value.

# Coefficients are unstandardized.

* p < .05, ** p < .01, *** p < .001.

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were again plus and minus one standard deviation from the mean. Figure 3 shows the interaction patterns predicting financial performance. HR capital had little relationship with financial performance when HR capitalDV was low, whereas there was a positive trend when HR capital-DV was high. Similar patterns were observed for education and emergency services performance (see Figures 4 and 5). Thus, Hypothesis 1 was supported for three of the four performance measures.

Discussion

Theoretical Interpretations
Much previous research has argued that there are ideal kinds of human resource practices (e.g., training, performance appraisal) that are universally advantageous to organi-

zations (e.g., Huselid, 1995). Others have drawn from a contingency perspective (e.g., Wright & Snell, 1998), as we do in this article, in suggesting that effective SHRM involves choosing the right HR practices for the organizations particular design and strategy (see Delery & Doty, 1996). The problem, as noted by Wright et al. (2001), is that no attempt has yet been made to empirically assess the validity of the proposition that HR practices . . . are path dependent or causally ambiguous, nor whether they are actually difficult to imitate (p. 708). The same can be said of the organizations stock of human resource capital, which has become the focal resource in SHRM research (versus HR policies and practices) only in the more recent studies. Recently, researchers have also pointed out the challenge of using quantitative methods in testing the core

FIGURE 3. Interaction Between HR Capital and Distinctiveness in HR Capital Predicting Financial Performance (Public-Sector Analysis)

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FIGURE 4. Interaction Between HR Capital and Distinctiveness in HR Capital Predicting Education Services Performance (Public-Sector Analysis)

concepts of the RBV (see Hoskisson et al., 1999). One of the major difficulties has been to measure the concepts in a way that enables a full test of the model, rather than inferring distinctive value or competitive advantage from the presence of substantial resources or sustained high performance. Similar to Carmeli and Tishlers (2004a, 2004b) attempt to overcome this difficulty, we followed Robins and Wiersemas (1995) suggestion to operationalize the theory by adopting approaches rooted in the behavioral sciences. Our results show that a resource domain (HR capital) and distinctive value that can be derived from this resource (i.e., HR capital-DV) are distinct constructs when assessed by the opinions of top decision makers. Questions concerning the respective roles of HR policies and practices and of HR capital have motivated much recent SHRM research. However, HR capital has become

increasingly central to research in this literature. This increased interest may derive partly from the debate over the potential of HR policies to be a source of value creation. Compared to HR policies and practices, a competitive advantage in HR capital is more difficult for competitors to imitate. Our findings suggest that high-quality HR capital may not be a sufficient condition to advance the performance of an organization. If our findings represent the actual underlying relationships, it is the quality of HR capital combined with the strategic use of that resource that influences organizational outcomes such as service performance (customer satisfaction, quality of products) and financial performance in commercial organizations and financial performance and services effectiveness in public-sector organizations. Among the commercial organizations, we observed that financial and service performance criteria were substantially higher

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FIGURE 5. Interaction Between HR Capital and Distinctiveness in HR Capital Predicting Emergency Services Performance (Public-Sector Analysis)

in magnitude when leaders perceived that the organization not only possessed strong HR capital, but that it also leveraged this resource in a highly effective manner such that it was rare, valuable, difficult to imitate, and difficult to substitute. Public-sector organizations (local authorities in Israel) demonstrated essentially the same trends as the commercial organizations. With the exception of the two financial performance indices in the private-sector analysis, organizations in both studies tended to exhibit the lowest performance relative to other organizations when their leaders perceived a distinctive value derived from their HR capital and at the same time perceived that their HR capital stock was low. Causal ambiguity is inherent within the definition of distinctive value, so it is conceivable that leaders might themselves misinterpret cause and effect in their assess-

ments. We addressed the causal ambiguity issue by conducting analyses that posited HR capital-DV as the dependent variable and the performance indexes within the product term in its place (e.g., financial performance X HR capital). None of the HR capital X performance blocks was significant in predicting HR capital-DV. Nevertheless, one seeking to test more conclusively the construct validity of such leader assessments of distinctive value might conduct a longitudinal study. This study could obtain leader assessments and tracks changes over time, seeking to identify sustained linkages between evaluations of distinctive value and organizational performance criteria. Long-term prospective studies could address important issues, such as the role of time in the development of distinctive value. Ideally, such studies would use multiple high-level respondents from each organization. When multiple respon-

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dents have been used in past studies (e.g., King & Zeithaml, 2001), sample size has been too low to be confident about generalizing to a population of organizations. Although we focused on the stock of human capital rather than on particular HR function practices, we diverged from the universalistic HR practices view only in our emphasis. HR practices certainly serve a critical role in ensuring effective utilization of human resources. Effective HR practices are also needed to generate quality HR capital, but this does not in itself assure that this resource will be applied productively in supporting or developA key managerial ing other core competencies (see Delery & Shaw, 2001). By distinchallenge is how to guishing empirically between HR capital and its distinctive value design a human and finding that these two factors resource system interact in predicting performance, the present study is consisthat creates a tent with a contingency perspecthat argues having distinctive value for tive high-quality human capital alone is not sufficient to generate disthe organization. tinctive value from these resources. In the following section, we discuss the role of HR practices and other elements of HR design in developing distinctive value from HR capital.

Managerial Implications
The results of these studies suggest that having a stock of HR capital is akin to having a strong mix of talented players on a sports team. In contrast, knowing how to leverage HR capital in a distinctive way is akin to knowing secrets about how to coach and manage players so as to maximize their chance of victory. A high level of HR capital is likely to advance organizational performance when special competencies exist for understanding the opportunities and constraints of utilizing this capital, along with the initiative to put this knowledge into action. HR capital that is scarce, inimitable, and nonsubstitutable (i.e., distinctive) contributes to the overall performance of business firms and public-sector organizations.

Below, we discuss how the findings have practical implications for staffing processes, the development of high-involvement work processes, and senior managers assessments of the fit between HR capital and HR programs, processes, and practices. In an attempt to develop strong HR capital, HR managers usually focus their recruitment and selection activities on hiring new people with strong knowledge, skills, and abilities. Strong socialization practices that emphasize the norms and values that underlie organization culture should also figure prominently in plans to develop the firms HR capital. Therefore, selection criteria must also include the willingness of newcomers to embrace the firms values, norms, and conduct (i.e., culture) to enable channeling their KSAs in the most appropriate direction. An internal labor market (ILM) may also prove vital for many larger organizations. Explicit career path, employee development, and succession planning activities not only facilitate building on existing talent strengths, but they are also key to retaining talent and motivating more able employees to seek both general and firm-specific development goals. A well-managed selection process makes advancement opportunities and the developmental paths to them very clear to employees. This selective advancement process can enhance the organizations ability to retain and more fully utilize those employees who demonstrate a higher level of fit in the organizational system. The performance management system, in turn, plays an important role in identifying knowledge and performance deficiencies that require targeted training and development programs and the individuals most suitable for particular career paths. A key managerial challenge is how to design a human resource system that creates a distinctive value for the organization. Evidence suggests that implementing high-involvement HR systems (often called highperformance systems) is a major step toward utilizing the organizations human capital in a manner that leverages other aspects of the organizations design. A set of consistent and complementary HR strategies is formulated

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in high-involvement HR systems. For example, the reward system must be focused on reinforcing behavior that is both consistent with the organizational culture and promotes organizational goals. Depending on the rest of the organizations design and context (e.g., environment, strategy, technology), this may involve implementing skillbased pay programs and seniority systems, reconsidering the mix between fixed and variable pay, and deciding whether to reward skill acquisition and credentials more or less than performance. Such high-involvement HR systems enable the human capital pool to be utilized in a more value-producing manner and provide for greater fit between operations and the broader organizational environment (Delery & Shaw, 2001). Human resource levers (e.g., reward systems, recruitment practices) that are internally consistent and aligned with the organizations technology, culture, and strategy (see Delery, 1998; Rivkin, 2000; Siggelkow, 2002) contribute to overall organizational performance. Members of high-involvement systems tend to be highly skilled, knowledgeable, involved, committed, less likely to quit, and motivated to exert their best (see Appelbaum, Bailey, Berg, & Kalleberg, 2000; Batt, 2002; Delery, 1998), but depending on the organizational context, a high-involvement work system may sometimes be less suitable than other internally consistent HR systems. HR professionals play a key role in working with line managers to identify strategies for developing human capital in a manner that is very relevant to the business activities of their units. Importantly, our study results indicate that this effect of leveraging HR capital is not limited to commercial organizations; rather, it extends even to nonprofit governmental authorities. As we explained earlier, organizations such as local governmental authorities are also concerned about developing and maintaining competitive advantage, as they compete with one another for business investment and private residents. It is possible, then, that the RBV formulation may be less relevant to organizations such as federal authorities that maintain a monopoly position in their areas of service.

One way to address this managerial challenge of creating distinctive value is to carefully examine the extent to which human resource policies and practices are consistent with one another. HR policies also must be aligned with the strategy, culture, and technology of the organization as well as with the broader environmental characteristics such as demands for innovation or customer responsiveness. Thus, an assessment of the distinctive value of HR requires a thorough analysis of these context factors to determine the organizations critical HR success factors (Baron & Kreps, 1999). Critical HR success factors are Our study results the translations of strategic and situational demands into specific indicate that this HR imperatives (e.g., cooperative behavior within and between effect of leveraging teams). Complementarities of HR HR capital is not elements are better ensured when HR system changes are made with limited to the same critical HR success factors in mind. For example, if an commercial organization identifies conscienorganizations; tiousness about safety to be a critical HR success factor, then the rather, it extends practices associated with recruitment and selection, training and even to nonprofit development, job design, incentives, and performance managegovernmental ment can be mutually redesigned authorities. in a manner that reinforces safety consciousness. HR practices often conflict with one another, such as when incentives are inconsistent with appraisal criteria and training. Eliminating conflicts alone is not likely to create distinctive value. As noted by Dreher and Dougherty (2001), subtle changes in one or two aspects of the employees environment tend to change behavior very little. Meaningful behavioral change that produces distinctive value is more likely to occur when all elements of the HR system support one another in encouraging desired behaviors. This synergy is the cornerstone of creating a sustainable competitive advantage from HR. Senior managers are able and motivated to be informed about how different HR

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levers may or may not leverage one another and other organizational resources and capabilities toward achieving desired outcomes. As stated by Barney (1991), managers are important in this [the RBV] model, for it is managers that are able to understand and describe the economic performance potential of a firms endowments (p. 117). Evaluating the value and inimitability of an organizations stock of human the major SHRM capital is possible only if one understands the complex and often task of top subtle means by which these asmanagers is to align sets leverage other elements of the design and strategic direction various interests of the organization. A top managers assessment of his or her orand resources ganizations distinctive value in HR capital may be expected to within their take account of current HR pracorganizations and to tices as well as alternative practices that could lead to better utidevelop a talented lization of the HR capital. This assessment is often a great chaland committed lenge, however, because changes workforce. in competitive and technological environments limit ones ability to make causal connections between changes and operational outcomes. As suggested by Boxall (1996), the major SHRM task of top managers is to align various interests and resources within their organizations and to develop a talented and committed workforce. Much has been written about the potential for HR professionals to contribute to developing and implementing business and corporate strategies (see Brockbank, 1999). HRM generalists can contribute more value to their organizations by working with senior managers to gauge their assessments of the broader context and to elaborate and structure these assessments using the generalists broad technical knowledge of the organizational architecture. Generalists also help to determine the implications of these assessments for critical HR success factors. They must gain senior management support to implement what may amount to significant changes in the HR system, especially if the firm needs extensive work to establish internal consistency and fit

among HR design elements and critical HR success factors. Lower-level managers must also be involved in the planning of HR redesign so they can more fully appreciate HRs contributions to their operations. Another conceptual task for senior managers is to determine whether the HR system design, per se, should be the focus of change, or rather that the emphasis should be on acquiring higher-quality HR capital. Twentyone percent of organizations in the commercial sample and 16% of organizations in the public-sector sample scored both above the median on distinctive value from HR capital and below the median on HR capital. It is possible that in these organizations, leaders were more concerned about how the human capital was being used than they were about the stock of qualities of skills and abilities currently available. This type of situation may be most amenable to the contributions of a highly skilled and well-resourced HR function that can attract, select, and develop a workforce with desirable knowledge, skills, and abilities. The success of such efforts is better assured when top management has a clear vision about how to match new and existing workers with other resources. Future research that takes a finer-grained approach to understanding organizations competitive positions in terms of HR capital might reveal, for example, that organizations in this position are in a growth mode and expect greater returns from their distinct competencies in the future.

Conclusions
Our findings support the RBV as it applies to HR capital. More specifically, these findings suggest that organizations seeking to improve performance through increased HR capital are more likely to succeed when they ensure that newly acquired or developed HR capital fully utilizes the existing organizational design in a manner that cannot be readily substituted by alternative resources, is very unique, and cannot easily be applied to a different organizational design with the same level of effectiveness. This contingency relationship may extend beyond the com-

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mercial organizations typically studied in RBV research to public-sector organizations. It appears that the RBV can be tested explicitly (i.e., explicit measurement of the core constructs and explicit model specification) in a relatively large and heterogeneous sample of organizations, provided that top leaders assess parsimonious indexes of the constructs. HR professionals should work with senior managers to structure and elaborate their assessments of the organizational architecture and the organizational context to-

ward developing HR designs that will build distinctive value.

Acknowledgment
The authors equally contributed to this article. We wish to thank Frank Linnehan, Jason Shaw, the associate editor, and three anonymous reviewers for their helpful comments and suggestions. We also benefited from comments of the seminar participants at the Graduate School of Business Administration at Bar-Ilan University.

ABRAHAM CARMELI is a faculty member in the Graduate School of Business Administration and the Department of Political Science (joint appointment) at Bar-Ilan University. He received his PhD from the University of Haifa. His current research interests include complementarities of intangible resources, top management teams, organizational prestige and image, and individual behaviors at work. JOHN SCHAUBROECK is a professor in the Department of Management of the LeBow College of Business at Drexel University. He received his PhD from Purdue University. His research interests are related primarily to cross-cultural and psychological issues associated with leadership and strategic human resource management and work-related stress and employee health. He serves as an associate editor of Organizational Behavior and Human Decision Processes.

NOTES
1. When only two dummy variables were formed (high-tech and mid-tech [1] compared to low-tech [0]), there was no change in the results. 2. The HR capital and the perceived distinctive value of HR capital (HR capital-DV) items were subjected to a principal components factor analysis with Varimax rotation. This analysis produced two factors that together explained 64.2% of the overall item variance. The first factor, comprised of the HR capital items (eigenvalue = 2.65), had factor loadings ranging from .60 to .90. HR Capital-DV items comprised the second factor (eigenvalue = 2.49), with item loadings ranging from .75 to .85 (see Table I). There was no correlation between the two composite scales (r = .03, see Table II). A separate factor analysis of the four performance indexes produced a two-factor solution that together explained 78.21% of the overall item variance. The results of this factor analysis indicated that return on equity and overall financial performance loaded on the same factor (eigenvalue = 1.73). Quality of the or-

ganizations products/services and customer satisfaction loaded on a separate factor (eigenvalue = 1.39), with item loadings ranging from .86 to .90. 3. The HR capital and the perceived distinctive value of HR capital (HR capital-DV) items were subjected to a principal components factor analysis with Varimax rotation. This analysis produced two factors that together explained 61.35% of the overall item variance. The first factor, comprised of the HR capital items (eigenvalue = 3.64), had factor loadings ranging from .83 to .90. HR Capital-DV items comprised the second factor (eigenvalue = 1.27), with item loadings ranging from .51 to .73 (see Table I). Unlike Study 1, there was a significant correlation between the two composite scales (r = .42, see Table IV). A separate factor analysis of the performance variables explained 80.7% of the overall item variance. Collecting efficiency ratio and self-income ratio loaded on the same factor (eigenvalue = 1.61). These two ratios were therefore averaged to form a composite index we labeled Financial Performance. The number of residents (size) correlated positively and significantly with financial performance (p <

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.05), but not the other performance indexes (see Table V). This is consistent with results of previous studies showing that, compared to smaller public authorities in Israel; larger local authorities had better financial standing (e.g., Razin, 1999). A separate principal components factor analysis was run to conduct Harmans one-factor test (Podsakoff et al., 2003). This analysis included all variables except local authority size and type. Six factors had eigenvalues greater than 1.0, and based on the loading matrix, all the variables corresponded to the composite factors that were used in the analysis (i.e., HR capital, HR capital-DV, financial performance, education services performance, welfare services performance, and emergency service performance). ties, and the performance of industrial firms: A multivariate analysis. Managerial and Decision Economics, 25, 299315. Carmeli, A., & Tishler, A. (2004b). The relationships between intangible organizational elements and organizational performance. Strategic Management Journal, 25, 12571278. Cohen, J., & Cohen, P . (1983). Applied multiple regression/correlation analysis for the behavioral sciences (2nd ed.). Hillsdale, NJ: Erlbaum. Delery, J. E. (1998). Issues of fit in strategic human resource management: Implications for research. Human Resource Management Review, 8, 289310. Delery, J. E., & Doty, D. H. (1996). Modes of theorizing of theorizing in strategic human resource management: Tests of universalistic, contingency, and configurational performance predictions. Academy of Management Journal, 39, 802835. Delery, J. E., & Shaw, J. D. (2001). The strategic management of people in work organizations: Review, synthesis, and extension. In G. R. Ferris (Ed.), Research in personnel and human resources management (pp. 165197). Amsterdam: Elsevier Science. Dess, G. G., Ireland, R. D., & Hitt, M. A. (1990). Industry effects and strategic management research. Journal of Management, 16, 727 . Dreher, G. F ., & Dougherty, T. W. (2001). Human resource strategy: A behavioral perspective for the general manager. Boston: McGraw-Hill. Farjoun, M. (1994). Beyond industry boundaries: Human expertise, diversification and resource-related industry groups. Organization Science, 5, 185199. Ferris, G. R., Hochwarter, W. A., Buckley, M. R., HarrellCook, G., & Frink, D. D. (1999). Human resources management: Some new directions. Journal of Management, 25, 385415. Hecht, A. (1997). Restructuring municipal finance in Israel. Jerusalem: The Floersheimer Institute for Policy Studies. [In Hebrew]. Hecht, A. (2002). Local leaderships lead the change. In The 2002 Annual Report on Israels Social Services (pp. 325344). Jerusalem: The Center for Social Policy Studies in Israel. Hitt, M. A., Bierman, L., Shimizu, K., & Kochhar, R. (2001). Direct and moderating effects of human capital on strategy and performance in professional service firms: A resource-based perspective. Academy of Management Journal, 44, 1328. Hoskisson, R. E., Hitt, M. A., Wan, W. P ., & Yiu, D. (1999). Theory and research in strategic management: Swings of a pendulum. Journal of Management, 25, 417456.

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APPENDIX

A Survey Items Measuring the Distinctive Value of HR Capital

Respondents were asked as follows: Please consider the resources and capabilities your firm owns and/or possesses (e.g., culture, control, labor relations, managerial competencies, relations with public stakeholders, strategic planning capability, human resource capital) and rate the resources according to their value, rarity, inimitability, and nonsubstitutability. Please assess: 1. The value of HR capital (i.e., how much it contributes to the organizational success) from 1 = most valuable to 9 = least valuable resource. 2. The rarity of HR capital (i.e., how rare and unique is the firms HR capital) from 1 = very scarce to 9 = not scarce at all. 3. The degree to which the HR capital is inimitable (i.e., the extent to which the firms HR capital is costly-to-copy by the competitors) from 1 = highly inimitable to 9 = highly imitable. 4. The degree to which the HR capital is nonsubstitutable (i.e., how many competing firms already have strategic equivalent HR capital to the one owned/possessed by your firm) from 1 = substitutable to 9 = nonsubstitutable.