Week 1

An investment
perspective of HRM
Instructor: Luong Thanh Thao
Readings: Mello, J.A., Chapter 1, Reading 1.1

Learning objectives
Understand the sources of employee value
Understand the importance of human capital and
how it can be measured
Understand how competitive advantage can be
achieved through investment in employees
Appreciate metrics, their measures and their
usefulness
Understand obstacles that prevent organizations
from investing in their employees

Definition
Competitive Advantage
An advantage
over competitors gained by
offering consumers greater
value than competitors offer

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What is Competitive advantage?

When two or more firms compete within the same
market, one firms possesses a competitive
advantage over its rivals when it earns a persistently
higher rate of profit (or has the potential to earn a
persistently higher rate of profit)
R. M. Grant, 2000

Competitive advantage
230-year-old
Encyclopedia Britannica
viewed itself as
competing with your
publishers of printed
encyclopedias.
Big mistake!
Its real competitors
were software
encyclopedias and the
Internet

Critical sources of
competitive advantage

Sustainable competitive advantage

What is meant by sustainable competitive advantage?
Durable
Valuable to the firm
Unique
Difficult for competitors to imitate
Not easily substitutable

Traditional sources of competitive advantage

Cost advantage

Competitive
advantage

Differentiation advantage

Competitive advantage map

Source: Competitiveness: Strategies of the best UK companies, Winning DTI-CBI

Prerequisites
Quality
Low cost

Elements of differentiation
Quality
Low cost

Operational performance

Oper. performance

Delivery time

Delivery time
Creditability

Creditability
Product Service
Design
Marketing
Customer service
Customized product
Reputation
Innovative product

Product Service
Design
Marketing
Customer service
Customized product
Reputation
Innovative product

Sources of competitive advantage

A critical source of competitive advantage comes not
from:
The most ingenious product design/service
The best Marketing strategy
State-of-the-art technology
The most savvy financial management
But from:

Having the appropriate system for attracting,

motivating, and managing the organizations HR

Adopting an Investment
perspective of HRM

Human assets
Employees have been viewed as variable costs of
production
Viewing employees as asset leads to important
implications for strategic HRM
the need to adopt an investment perspective
Human assets cannot be duplicated and thus become a
source of competitive advantage
Advanced technology require laborers being replaced by
knowledge workers people need to be invested more

An investment perspective of HRM

Employees something of value and worth
Strategic view of HR consider employees as asset "and
develop appropriate programs to invest on this important
asset
Successful and most competitive organizations realize that
employees have value like other resources
Strategic view assist to plan investment on acquisition and
management of human resources considering possible risk
and return

An investment perspective of HRM

HR can not be duplicated
Physical assets such as production facilities, products and
services, process, and technology can be imitated by
competitors while unique combination of human resource
capabilities can not be duplicated
Thoughts process, decision making process, and ability to
analyze complex data and environment are owned by
individual employees
If organization's main strategic objective is innovation, it
must consider human HR as investment.

Sources of employee value

Effective
organizations
realize that their
employees do
have value, much
as the
organizations
physical and
capital assets
have values

Source: Mello, J.A., Chapter 1

Types of organizational assets/capital

Ease of
measurement

Financial

Equity
Securities and investments
Accounts receivable

Physical

Plant
Land
Equipment
Raw materials

Easier

Goodwill
Branding
Customer loyalty
Product line
Distribution networks
Patents, trademarks, copyrights

Market

Management practices
Structure of work
Technology

Operational

Education
Knowledge
Skills
Competencies
Work habits and motivation
Personal Relationships

Human
More difficult

Measuring Human capital

The studies about HPWS (Huselid, mid 1990s) show that
integrated, strategically focused HR practices were directly
related to profitability and market value.
Top 10% organizations enjoyed a 391% ROI in the
management of their human capital
HR Value chain (Dyer & Reeves): performance could be
measured via 4 different sets of outcomes:
Employee
Organizational
Financial & Accounting
Market based

Measuring Human capital

Expenses
Revenue
Profitability

Market-based outcome

Productivity
Quality

Financial/Accounting
outcomes

Attitudes
Behavior

Organizational outcomes

Employee Outcomes

HR Value Chain

Stock price

Measuring Human capital

HR practitioners striving to develop metric to measure the
value of HR relative to market value and profit
90% of Fortune 500 organizations in USA, Canada, and
Europe evaluate their HR practices on three metrics:
1. Employee retention and turnover
2. Corporate moral and employee satisfaction
3. HR expenses as a percentage of operational expenses

This approach fails to conceptualize the HR contribution in

share holder value and profit

Question: Why is valuation of human

assets/capital and analysis of human
capital investments often ignored by
senior managers?

Measuring Human capital

The staffing metrics focus and treat employee as expense
rather than asset
Accounting valuation method focus on current and past
value of assets whereas human capital asset value lies in
its ability to face and react to challenges coming ahead
The challenge is to develop financial metrics for value
added human capital investments initiatives for senior
managers
Another important metric for measuring human
performance was developed by Mercer

Measuring Human capital

Mercer Model Six Steps
Mercer model identify the process of measuring human
performance and documenting value created by specific
initiatives that create bottom line effect
1.
2.
3.
4.
5.

Identify a specific business problem that HR can impact

Calculate the actual cost of the problem to the organization
Choose the HR solutions that addresses all or part of the problem
Calculate the cost of the solution
six to 24 months after implementation, calculate the value of the
improvement for organizations
6. Calculate the specific return on investment (ROI) metrics
Mello, 2001, p.9.

HR Metrics

HR Metrics

Factors influencing how investment oriented

an organization is

Management Values
Senior management values and actions decide
organization investment in assets

The extent to which organization is investment-oriented on

human asset can be known through these questions:

1.

2.

3.

Does the organization see its people as being central to its

mission strategy ?

Does the both company wide and with in individual business units
support the value of human assets and their role in achieving
goals?
Does the management philosophy of the organization encourage
the development of any strategy to prevent the depreciation of
human assets, are they considered replicable and amortizable as
physical assets?

Utilitarianism approach

Cost Benefit Analysis (investment from utility perspective)

In this approach all costs and benefits are tried to quantify

For example: Development of Performance appraisal system

calculated based on direct cost and time spent on this initiative

Generally investment on HR and output are difficult to quantify

Its very difficult to access level of services required to prevent
customers from moving to competitors/or maintain their loyalty. Any
additional service has no impact on financial performance
Impact of employee moral program difficult to quantify, therefore,
organization reluctant to make investment

Attitude towards Risks

Universal principal higher a risk higher a return

In general, investment on human resource is very risky

Physical assets are property of company whereas

employees are not owned by it
If organization view investment on human resource
necessary for realizing strategic objectives they often
develop strategy to have ownership of employee services
such as long term employment, long term benefits,
opportunities for personal and professional development

Availability of Outsourcing

Cost-effective outsourcing facility is available

An investment oriented company make decision on

investment based on sustainable competitive advantage

Whether outsourcing provide more saving, effeciency, and

access to expertise

Nature of Employee skills

Employee skills that are specific and can not be applied to

other organization are less risky
Customized software knowledge(UBL using Unisoft)
Marketable skills applicable and demand in other
organizations
Need to apply retention strategy (ESOP)

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Conclusion

Organization need to develop effective strategy. Ex:

Employee stock ownership program
Employee stock ownership is beneficial for employee
commitment and stay with organization
When organization gains competitive advantage through
its employees, the strategic outcomes endure and
difficult to duplicate by competitors

Investment on human asset is long term and risky but

obviously it is source of sustainable competitive
advantage

Critical thinking

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