Rather than following the crowd in humau resource practices,firms should think about bozo heing different can help them create

the distinctiveness needed to succeed.

Distinctive Human ResourcesAre Firms' Core Competencies

PETER CAPPELLI ANNE CROCKER-HEFTER

F ind a firm with a reputation for excellencein some function, copy its practices, and

your company, too, will excel. Advice such asthis, under the rubric of "best practices" or"benchmarking," has flooded the popularbusiness literature. Each article implicitly ex-tends the argument that superior manage-ment practices are readily identifiable and canbe transferred across organizations.

The best practices advocates, however,must contend with a discomforting reality:Many firms^sotne very succcssjul—stubbornlyrefuse to adopt those practices. Are we to assume,perhaps, that competition drives out firmsthat do not adopt the most efficient tech-niques—and that the intractable companieswill ultimately fail? Hardly the case.

To understand what is happening, weneed to look at a counterpoint to the bestpractices approach. When it comes to ex-plaining how and why certain firms havecarved out competitive advantages, attentionincreasingly focuses on unique, differentiafingresources—the notion of "core competencies"being perhaps the best known of these re-source arguments.

We believe that the notion of a single setof "best" practices may, indeed, be overstated.As we illustrate below, there are examples in

virtually every industry of highly successfulfirms that have very distinct managementpractices. We argue that these distinctive hu-man resource practices help to create uniquecompetencies that differentiate products andservices and, in turn, drive competitiveness.Indeed, product differentiation is one of theessential functions of strategic management,and distinctive human resource practicesshape the core competencies that determinehow firms compete.

The argument that there should be a "fit"between human resource practices and busi-ness strategies can be traced back to man-power planning and is certainly not new inmanagement circles. What is new here is theargument that people management practicesare the iirivcryi—the genesis of efforts to createdistinctive competencies and, in turn, busi-ness strategies.

We illustrate this point by examining pairsof successful organizations competing in thesame industry. We chose the paired companiesby asking analysts, consultants, and other in-dustry experts to help us identify successful or-ganizations in their industry that appeared tohave very different employee managementpractices. We began our investigation with fi-nancial reports and other publicly available in-

Peter Cappelli is professor of manage-ment at the Wharton School, co-director ofWharton's Center for Human Resources,and co-director of the U.S. Department ofEducation's National Center of the Educa-tional Quality of ttie Workforce (EQW). Hehas degrees in industrial relations from Cor-nell University and in labor economics fromOxford, where he was a Fulbright Scholar.He has been a guest scholar at the Brook-ings Institution, a German fvlarshall Fund Fel-low, a faculty member at fvllT. the Universityof Illinois, and the University of California atBerkeley as welt as the Wharton School. Hewas a staff member on the secretary of la-bor's Commission on Workforce Quality andLabor Market Efficiency and was a memberof the Technical Subcommittee for Adult Lit-eracy (Goal 5) of the National Goals for Ed-ucation Panel.

Professor Cappelli's research for theEQW Center has examined changes in workand the effects on skill requirement, the con-tribution of work place attitudes and behav-iors to job-related skills, and the effects onwork force skills associated with choices ofemployment practices. He is beginning a ma-jor study of work organization in financial ser-vices to understand why high performancework systems have been so slow to take holdin that industry and is heading a major studyfor the National Planning Association on therestructuring of the employment relationship.

formation on the organizations, induding sto-ries in the business press over the past fiveyears. We also contacted each organization forinformation and in most cases visited them.The most revealing sources of information,however, tended to be competitors and formeremployees. The competitors in particular, typ-ically the other member of an industry "pair,"had a keen sense for what was truly distinctivein each organization. Former employees alsohave a clear sense abou t what actually happensinside organizations, as opposed to what thewritten practices say.

With the help of industry experts andcompetitors, we then identified the distinctivecompetencies and competitive advantages ofeach organization. There was remarkably lit-tle variance across respondents in what theybelieved these competencies to be. In mostcases, competencies were clearly associatedwith particular employee groups—customerservice, for example, or marketing.

The next step was to describe the employ-ment practices associated with the relevantemployee group. \n cases where practiceshave recently changed, we describe the long-standing practices that were in place when thedistinctive competencies were developed. Inour final step, we compared the distinctivecompetencies for each organization with theemployment practices for the relevant em-ployee group to suggest how these compe-tencies were created.

WHEN EMPLOYEESARE THE "PRODUCT"

The link between people management prac-tices and the way organizations compete ismost direct in industries where employees, bythemselves, create what the organizationsells—where the "product" is a service pro-vided directly by employees interacting withcustomers. Consider the following cases.

Professional Sports

Professional sports are obviously big busi-nesses in their own right, and it's easy to see

how "employee performance" matters in thisarena. The rules governing each sport stan-dardize the equipment, playing fields, andtime limits for all competitors. Within thoseparameters, each club must deliver its ser-vices—an event that attracts an audience.

Sports are idiosyncratic in other ways aswell. The fact that there is no "open" labormarket and that teams tend to control hiringthrough drafts may make it easier to align or-ganizations and employees than in other in-dustries. Fin<inci(il .success and the success ofthe team in its sport arc not always related,which may reduce somewhat the financial in-centives to seek out the most effective strate-gies and employee matches on the field.

The San Francisco 49ers and OaklandRaiders have been among the most successfulteams in American sports, yet they representvery distinct models of player management.The 49ers have succeeded by using a strategyof long-term player development—recruitingthrough college drafts rather than throughtrades, developing talent within the team, andthen holding on to the best players by keep-ing them happy. Their salaries are among themost generous in the league, and more thanin other clubs, the 49ers players have some in-fluence on team decisions and feel that theyare a part of the organization.

On the field, the club relies on experi-enced athletes who have worked with theircoaches for years and who act as team leaders.(The coaches and management staff also havelong tenure with the team.) They have a rep-utation for playing as a precise, well-disci-plined unit. Lung-tenure players also help cre-ate long-term relationships with fans, helpingcement their loyalty to the club. If productionlanguage could be applied to sports, this is a"high commitment" organization that oper-ates as a "quasi-autonomous team" on thefield. The approach has apparently paid off—the 49ers have won at least ten games a yearevery year since 1983.

The Raiders, in contrast, do not as <i ruledevelop their own players, but instead usetrades to scoop up talented players who fail ordo not Bt in elsewheru. The club has a veryhigh player turnover and a reputation as a col-

Anne Crocker-Hefter, a 1993 graduateof the Wharton School, is a consultant withAnderson Consulting Strategic Service inNew York.

How Do Management PracticesHelp Build Distinct Competencies?

Employee selection, i.e., the selection of em-ployees with distinctive capabilities, pro-vides the most obvious example of howmanagement practices create distinct com-petencies. Moreover, a company's reputa-tion for certain employment practices mayattract employees and thus push the pro-cess along, aligning individual and organi-zational attributes. In practice, this is an im-perfect mechanism. It requires that bothemployers and prospective employeeshave accurate information about each otherand it assumes stable characteristics andmobility between organizations. But there isconsiderable evidence that this matchingprocess between organizations and em-ployee characteristics does occur.

In addition, each organization has itsown training programs, rewards systems,and work organization, and these systemsdevelop skills and behaviors that help an or-ganization create distinctive competenciesfor attacking markets.

lection of individuals who often do not fit to-gether well. As an organization, the Raidersare not known for treating players especiallywell, or for letting them have much influenceon team decisions. The team, which has beencalled "an organizational anomaly," has anautocratic owner who is personally involvedin coaching and personnel decisions. No em-ployee participation here.

On the field, the Raiders are known fortheir individual performances and wide-openplaying style, a style that makes good use oftheir pool of individual talent. 1 he players arenot known for their personal discipline either,having "swashbuckled through BourbonStreet" during Super Uowl week, for example,and recovered by game day.

The practices of these two clubs createreputations that contribute to some self-selec-tion of players, reinforcing their systems;those comfortable working in disciplined sys-tems go to the 49ers while players who bridleat the constraints such systems impose go to

the Raiders. It makes sense for the 49ers tostaff their team with inexperienced playersfrom the college draft in order to better"stamp" them with their own system; playersfrom other pro teams are more likely to comein with expectations and playing habits thatmight be incompatible with the49ers' system.Similarly, the fact that the Raiders hire expe-rienced players who bring disparate attitudesand reputations that are not easily blendedhelps create their more individualistic playingstyle.

To some extent, football teams competefor fans the same way that firms compete forcustomers, and having distinct styles of playmay help build a national audience. A dis-tinctive and unusual style may be useful onthe field as well, in that it demands unusualresponses from the other side that may be dif-ficult to master.

Retailing: Sales as the Service

Sears and Nordstrom are both legends in theretailing industry.

Sears was the world's largest retailer forgenerations and has outlasted all of its histor-ical competitors. During the 198Us, Nord-strom set service and growth standards forthe industry. Although Sears stumbled in thisperiod—as did most department stores—ithas recently reorganized with improved per-formance.

Sears and Nordstrom are very differentcompanies, with different employment prac-tices, especially with reference to sales posi-tions—the key job in retailing. Yet each com-pany's practices make sense for its operations.

Sears has been and remains one of the pi-oneering firms in the science of employee se-lection. It relies on some of the most sophisti-cated selection tests in American industry.The company has refined these tests overtime to achieve extremely high predictivepower. Once hired, employees receive exten-sive training in company practices. Manage-ment also keeps track of employee attitudesand morale through frequent and rigorousemployee surveys.

Two practices are especially noteworthy

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in the management of saies representatives.The first is intensive training in Sears prod-ucts, operating systems, and sales techniques.The second is the pay program: a great manysales employees work on straight salary—notcommissions—and the commissions that arepaid at Sears are modest. (They have recentlybeen cut to one percent of sales.)

Nordstrom operates with virtually noneof the formal personnel practices advanced bySears. Indeed, its practices appear downrightprimitive in comparison. Nordstrom's hiringis decentralized and uses no formal selectiontests. Managers look for applicants with expe-rience in customer contact—not necessarilyprior retailing experience (which is often seenas a drawback). The important qualities are apleasant personality and motivation. Thecompany has only one rule in its personnelhandbook: "Use Your Best Judgment at AllTimes." Individual sales clerks run their areasalmost as if they were private stores.

Nordstrom maintains a continuousstream of programs to motivate employeestoward the goal of providing intensive ser-vice, but it offers very little of what could bethought of as training. The pay system is load-ed toward commissions, which makes it pos-sible for clerks to earn sizable incomes. Nord-strom sales personnel are also ranked withineach department according to their monthlysales; the most successful are promoted (vir-tually all managers are promoted from with-in) and the least successful let go.

In Nordstrom's fashion-oriented retailbusiness, the service that customers demandis not detailed knowledge of the products, butpersonal contact. The clerk's emotional ener-gy is important—and hustle, running acrossthe store to match an item, remembering anindividual customer's tastes, etc. Impulse pur-chases are more important in fashion than inother segments of retailing, and the clerk's ef-fort can be especially important in such sales.

The Nordstrom employment system fu-els an intense level of personal motivationand customer contact. The commissions, in-ternal competition, and motivation programsprovide the drive, while autonomy and theabsence of rules allow it to be exercised. Many

new hires do not survive—Nordstrom'sturnover ranks among the highest in the in-dustry. But because the investment in eachemployee is relatively small, such turnover isnot a real problem.

Sears is also in the retail business, ofcourse, and service is part of what it sells. Butit is service of a different kind, in part becausehousewares, rather than fashion, dominate itsproduct line. Customers buying home appli-ances or hardware want information aboutthe products and how they are used. Searsalso sells financing and warranties, reason-ably complicated services that require somebackground knowledge. As evidenced by itsmarketing ("The Name You Can Trust"),Sears trades, in part, on a reputation for steer-ing the customer in the right direction.

With this strategy, training is important,and turnover is costly—hence, the emphasison selection. Salary pay systems, as opposedto commissions, create no incentives to pushproducts irrespective of customer needs or tocut back on "non-selling time" associated withproviding information. Personal relationshipswith customers also help build a reputationfor honest and reliable service. Sears customersatisfaction data finds that the stores with thelowest employee turnover and the least tem-porary help have the highest satisfaction rat-ings. (Interestingly, Sears' problem with fraudin its automotive business a few years agoprovides an exception that proves the rule—automotive managers operated on commis-siotis and quotas that provided the incentivesto encourage repairs that in many cases wereapparently not needed.)

The restructuring of Sears during thepast two years smashed its no-layoff policy,but left other principles of employment intact.In fact, the amount of training for sales repre-sentatives has increased and the limited com-mission-based pay reduced further.

Professional Service Firms: Informationand Advice as the Product

Boston Consulting Group (BCG) and McKin-sey & Company are among the world's lead-ing strategic consulting firms. Both have

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world-wide operations, and their reputationsfor thoughtful leadership ond qiuility serviceto management are comparable. Ikith firmshire from the best undergradLiate and MBAprograms and compete for the top students.Both have rigorous selection procedures andexceptional compensation. Yet the character-istics of the people the two firms hire, and theway each firm manages people, differ in im-portant ways. Again, the practices relate tothe companies' approaches to their markets.

BCC tends to attract candidates with verybroad perspectives on business. Some havestarted their own businesses, and others leaveBCG to found new companies. BCG alsomaintains something of a "revolving door"with academia, hiring business school profes-sors as consultants and sometimes losing con-sultants to faculty positions in businessschools. Once hired, consultants jump rightinto work, albeit closely supervised, and theformal training they receive is likely to befrom outside courses.

BCG has an entrepreneurial environ-ment^an expectation that each project teamwill come up with its own innovative ap-proach. Each office is seen as having a slightlydifferent culture. BCG pays less than many ofits competitors, but offers more individualizedincentiv e pay, reinforcing the entrepreneurialculture.

While BCG has some standard "prod-ucts" such as time-based compt'tilion .ind ca-pabilities-based strategies, these are not thesource of its competency. Indeed, some prod-ucts, such as the "Growth-Share" matrix, arewell-publicized and basically given away. Thevalue-added comes from the customized ap-plication to the client's situation. Many ofBCG's projects do not even start with theseproducts but rather with a "clean sheet of pa-per" approach. What clients buy, therefore,are original solutions and approaches to theirproblems. And these approaches begin withconsultants whose varied backgrounds andentrepreneurial spirit help produce a uniqueproduct.

McKinsey, on the other hand, has histori-cally taken virtually all of its new hires fromon-campus recruiting and rarely hires from

other employers. It lends to prefer candidateswith technical backgrounds, such as engineer-ing and computer science, who have depth insome functional business area. The new en-trants vary less in terms of their managementexperience and come in as "blank slates" interms of their consulting ideas. If McKinseyconsultants leave, they are more likely to takesenior line management positions in corpora-tions than entrepreneurial positions.

McKinsey provides new consultants withextensive training in the company's methodof project execution and management, eventhough this is highly tailored to each client'ssituation. McKinsey's size^3,()0() consultantscompared to Ht)O at BCG—may create scaleeconomies in training new entrants that makeit easier for the firm to provide such programsitself. 1 he firm expects the career path to thehighest position, senior partner, to take ap-proximately 12 years (versus six to eight atBCG), which gives the consultants a long pe-riod to learn how to fit in.

The company is known for the "McKin-sey way." McKinsey believes that it is impor-tant to provide its clients with consistent ser-vices; the client knows what to expect fromthe prciject teams whose products and tech-niques are regarded as proprietary and arenot publicized. The firm's core competency,therefore, is in the consistent products andtechniques that constitute the "McKinseyway." This standardization is especially no-table given the far-flung nature of McKinsey'sempire. Half of its senior partners are abroad,and 27 of the 33 offices it has opened since1980 are outside the U.S.

Business Schools

A similar pattern of employment practices ap-plies across business schools. And becausethese schools serve as supply channels forbusiness, the pattern also influences the rela-tionships with firms that recruit at thoseschools.

As an employer, the Harvard BusinessSchool represents the end of the spectrimi as-sociated with internal development of skills.Harvard is well-known for identifying bright

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young academics who, in many cases, comefrom fields largely unrelated to business. Har-vard hires them as assistant professors andturns them into business experts. Harvard isalso known for a faculty with unique skillsand abilities: a deep and practical knowledgeof business problems typically acquiredthrough clinical methods, and the ability toteach "cases" using the Socratic method.Compared with other schools. Harvard is or-ganized more by problem areas and teachingresponsibilities than by traditional academicfields.

Several personnel practices support thedevelopment of these skills. Until recently, asystem of post-doctoral lellowships specifi-

Wharton hires its faculty from the network ofPh.D. programs and competitor schools withsimilar departments that make up the acade-mic labor market. It is extremely rare thatWharton will hire one of its own Ph.D. stu-dents. Indeed, a majority of the tenured pro-fessors have been hired away from a facultyposition elsewhere. The tenure decision isbased largely on evaluations fnim faculty atother schools as a way of ensuring that suc-cessful candidates truly have skills recognizedelsewhere. And a shorter tenure clock makesit easier tti move faculty in and out, makinguse of the outside market.

What Wharton gets from its faculty, then,are skilK (iriented toward academic fLinction-

Organizations that move quickly to

seize new opportunities compete through

flexibility and do not develop employee

competencies from within.

cally for Ph.D.s in non-business fields helpedthem learn about business. The best of thesefellows were then hired as assistant profes-sors. A second practice is a longer tenureclock than at many schools^nine years—which makes it easier for candidates to makethe significant investment in Harvard-specif-ic methods and for the inslitution to observewho is really fitting in. The tenure evaluationis more likely to stress factors specific to Har-vard, such as course development, and torely on evaluations from internal faculty. Fi-nally, Harvard has been much more inclinedthon nK>st sclmols to hire its own students asfaculty, pro\ iding a more direct way of en-suring that the faculty "fit" into the organiza-tion.

The Wharton School exemplifies the oth-er end of the continuum. It seeks facultywhose work is recognized as excellent in aca-demic fields such as finance, accounting, andmanagement. Like most business schools.

al areas. Within the school, departments areorganized according to academic fields. Andthe fact that it \s the largest of the major busi-ness schools ensures that each departmenthas considerable depth.

Given these different orientations, it isnot surprising that the two schools producedifferent "products"—MBA students with dif-ferent strengths. Harvard graduates areknown for their general management orien-tation and superior discussion skills, whileWharton graduates have superior analyticskills associated with functional areas. Itmakes sense, therefore, that companies inter-ested in general talent like McKinsey preferHarvard's MBAs while those interested inspecific skills, like the investniL-nl banks, pre-fer Wharton graduates. In 1992, for example,26 percent of the Harvard MBA class wentinto consulting compared with 20 percent atWharton, while 27 percent of the Whartonclass went into commercial and investment

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banking compared with only 18 percent atHarvard.

Financial Services

The property and casualty section of the in-surance industry is based, perhaps more di-rectly than other businesses, on knowledgeand skills. The ability to idenfify and assessrisk in unique situations, for example, is thecentral issue in this business, so it may not bea surprise that employees and the practicesused to manage them are at the heart of com-petencies in this industry.

Yet we find a very wide range of peoplemanagement practices and ptilicies in the prop-erty and casualty business, a range that onceagain appears to result from different competi-tive strategies that are driven by different com-petencies. The two property and casualty firmsexemplifying the most marked difference withrespect to people management are Chubb andAmerican Internafional Group {A.I.G.). Yetboth are among the most profitable firms in theentire insurance industry.

Chubb, often described by competitors asthe "Cadillac" of its industry, is successful bybeing the best at what it does. Chubb does notcreate new markets or drive the ones that it isin through low prices. Instead, in the proper-ty business, it tries to find the very best risksthat will provide a high return on its premi-ums. Chubb often goes after customers of oth-er firms who it believes are good risks, identi-fies "gaps" or problems in their coverage, andoffers them superior insurance protection. Ftirboth businesses and individuals, Chubb alsolooks for customers who are willing to pay apremium for superior service that is manifest-ed by intensive customer contact. It has a rep-utaHon for being the "insurer of choice" forthe very wealthy who are willing to pay a pre-mium for superior service and customer con-tact.

In short, Chubb earns above-market prof-its by targeting those customers who will paysome premium for superior products and ser-vice and by identifying particularly good risksnot spotted by competitors. These competen-cies—superior underwrifing and service—are

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generated by Chubb's employee manage-ment practices.

Chubb makes a substantial investment inits employees, beginning with recruitment.Historically, it has recruited graduates, re-gardless of major, from the most prestigiousundergraduate schools. These candidates, of-ten from the liberal arts, come with the inter-personal and communication skills uponwhich insurance-specific skills can be built.The recruiters seek out applicants who "looklike" Chubb's customers—i.e., who have per-sonal contacts in the monied class and arecomfortable with potential customers in thatsocial stratum. New hires participate in sever-al months of intensive training and tesfing be-fore going to the branch into which they werehired. For the next 6 to 12 months, they workalongside established underwriters in an ap-prentice-like system.

With this substantial investment in skills,the company goes to great lengths to ensurethat the new workers (and their skills) stayaround long enough for the investment to berecouped. First, Chubb keeps its underwritersfrom the boredom of desk jobs, which oftenproduces turnover elsewhere, by makingthem agents. The fact that underwriters go tothe field to do the selling is a key factor in cre-ating Chubb's competency. It eliminates com-munication problems that might otherwiseexist between the sales and underwritingfunctions. The underwriter gets better infor-mation for asse.ssing risks, and also providescustomers with better service, including bet-ter information about their risks. The superi-or abilifies of the underwriter/agents make itpossible to combine these two roles.

Second, Chubb fills vacancies internally,moving people frequently and retrainingthem for new jobs. The pace of work eventu-ally pushes some people out of the organiza-fion, but they rarely go to other insurancecompanies and more typically become inde-pendent agents, helping to expand the net-work for Chubb's business. And this turnoverexpands what would otherwise be very limit-ed opportunities for career development in areasonably stable organization.

American Internafional Group (A.I.G.)

achieves its high level of profitability in a dif-ferent way, but one that also relies on its hu-man resources. A.I.G. is a market maker. Itidentifies new areas of business, creates newproducts, and benefits from "first mover" ad-vantages. It was the first insurer allowed intocommunist China and has recently enteredthe Russian market. A.I.G. thrives by findingmarkets where it has little competition, often

the original management team at A.I.G. Glob-al Investors after determining that the profitpotential in that market was no longer there.The fact that the company changes markets soquickly would make it difficult to recoup aninvestment in developing employees withmarket-specific skills itself, so it relies on theoutside labor market instead.

The advantages of speed in attacking

Organizations that compete through theirdominance in a market rely on organization-specific capabilities developed internally.,.

insuring high-risk operations that competi-tors avoid. Once companies ihat compete onprice enter its markets, A.I.G. might wellmove on to another product.

The company's competencies, therefore,are in marketing—identifying new businessareas—and in the ability to change quickly. Itpursues change with a set of policies that arevirtually the mirror opposite of Chubb's. Op-erafing in a highly decentralized manner bycreafing literally hundreds of subsidiary com-panies, each targeted to a specific market, itcreates new companies to attack new marketsand staffs them by hiring experts with indus-try skills from other firms. It has been knownto hire away entire operations from competi-tors, typically for much higher pay. For exam-ple, it hired the head and seven other mem-bers of Drexel Burnham Lambert's interestrate swap department in 1987 as part of itsmove into capital markets.

A.I.G. has little interest in developingcommonalities across its companies. The exec-utives in each company are managed througha series of financial targets—with generous re-wards for meeting the targets—and are other-wise given considerable autonomy in runningthe businesses. When a market dries up ortough competition enters the picture, A.I.G.may close shop in that arena. For example, thecompany's top executives forced out most of

markets effectively make other ways of com-peting difficult. For example, hiring experi-enced employees away from competitorswithout offering any real job security meansthat A.I.G. is paying top dollar to get them, anexpense that would make it difficult to com-pete as a low-cost provider. The reverse argu-ment could be made about Chubb, that the in-vestment in people required to develop thecompetencies needed to exploit existing mar-kets would be too slow and expensive for at-tacking new markets as they emerge.

BEYOND DIRECT SERVICES

The link between employees and productmarket strategy is sometimes less direct whenone moves away from services. But there aresHU relaHonships between the way employeesare managed, the competencies employeeshelp produce, and the way companies com-pete. Let's consider two examples, one from aservice industry that relies heavily on tech-nology, the other from food and beveragemanufacturing.

The Shipping Business

It is difficult to find two companies with peo-ple management systems that are more dif-

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ferent than those at Federal Express and Unit-ed Parcel Service. FedEx has no union, and itswork force is managed using most of the"hot" concepts in contemporary human re-source management. The company has pay-for-suggestion systems, quality-of-worklifeprograms, and a variety of other arrange-ments to "empower" employees and increasetheir involvement. The most important ofthese may be its "Survey-Feedback-Acfion"program that begins with climate surveys andreviews by .subordinates and ends with eachwork group developing a detailed action planto address the problems identified by the sur-veys and reviews.

Employees at FedEx play an importantrole in helping to design the work organiza-tion and the way technology is used, and em-ployee hustle and mofivation have helpedmake FedEx the dominant force in theovernight mail business. As evidence that ini-fiatives paid off, FedEx claimed the honor ofbeing the first service company to win theMalcolm Baldrige National Quality Award.

One of the goals at FedEx is that everyemployee should be empowered to do what-ever is necessary to get a job done. Decentral-ized authority and the absence of detailedrules would lead to a chaotic pattern of disor-ganized decisions in the absence of a strongset of common norms and values. FedExachieves those with an intensive orientationprogram and communicafion efforts that in-clude daily information updates broadcast toeach of its more than 200 locations. Empow-ering individual employees also requires thatthey have the information and skills to makegood decisions. FedEx requires that employ-ees pass interactive skills tests every sixmonths. The tests are customized to each lo-cafion and employee, and the results are fiedto a pay-for-skill program.

UPS, on the other hand, has none ofthese people management practices. Em-ployees have no direct say over work organi-zation matters. Their jobs are designed in ex-cruciating detail, using time-and-motionstudies, by a staff of more than 3,000 indus-trial engineers. Drivers are told, for example,how to carry packages (under their left arm)

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and even how to fold money (face up). Thecompany measures individual performanceagainst company standards for each task, andassesses employee performance daily. Thereare no efforts at employee involvement otherthan collective bargaining over contractterms through the Teamsters' Union. Theunion at UPS does not appear to be the forcemaintaining this system of work organiza-tion. The initiative on work organization is-sues has been with management, which hasshown little interest in moving toward worksystems such as FedEx champions. Indeed,the view from the top of the company hasbeen that virtually all of the company's prob-lems could be addressed by improving theaccountability of employees—setting stan-dards for performance and communicatingthem to workers.

The material rewards for working at UPSare substantial and may, in the minds of em-ployees, more than offset fight supervisionand the low level of job enrichment. The com-pany pays the highest wages and benefits inthe industry, and it also offers employeesgainsharing and stock ownership plans. UPSremains a privately held company owned byits employees, hi contrast to FedEx, virtuallyall promotions (98 percent) are filled fromwithin, offering entry-level drivers excellentlong-term prospects for advancement. As aresult of these material rewards, UPS employ-ees are also highly motivated and loyal to thecompany. The productivity of UPS's drivers,the most important work group in the deliv-ery business, is about three fimes higher(measured by deliveries and packages) thanthat at FedEx.

Why might it make sense for UPS to relyon highly engineered systems that are gener-ally thought to contribute to poor morale andmotivation, and then offset the negative ef-fects with strong material rewards, especiallywhen FedEx offers an alternative model withhigh levels of morale and mofivation andlower material rewards? Differences in tech-nology do not explain it. FedEx is known forits pioneering investments in information sys-tems, but UPS has recently responded with itsown wave of computerized operations. Yet

the basic organization of work at UPS has notchanged-

The employment systems in these twocompanies are driven by their business strate-gies. FedEx is much the smaller of the twocompanies, operating until recently with onlyone hub in Memphis, and focusing on theovernight package delivery service as its plat-form product. UPS, in contrast, has a muchwider range of products. While its overnightdelivery volume is only fit) percent of Fed Ex's,its total business is nine times as large (11.5million deliveries per day versus 1.2 million atFedEx).

The scale and scope of Ul'S's business de-mand an extremely high level of coordinafionacross its network of delivery hubs, coordina-tion that may be achievable only throughhighly regimented and standardized job de-sign. The procedures must be very similar, ifnot identical, across operations if the differentdeliver)' products are to move smoothly acrossa common netwc>rk that links dozens of hubs.

The highly integi'ated system at UPS par-allels the experience with assembly line pro-ducfion, where workers are closely coupled toeach other by the line. The elimination of"buffers" or inventory stocks between workstations associated with just-in-fime systemsincreases the coupling and dictates that thepace at which work fiows be the same acrossall groups, substantially eliminaHng the scopefor autonomy within groups and increasingthe need for coordination across groups. Thedelivery business is like an extreme version ofa just-in-fime system in that there can be nobuffers. A package arrives late from anotherhub, and it misses its scheduled delivery—clearly a worse outcome even than a tempo-rary break in the fiow of an assembly line.And the more points of interchange, the morethe need for coordination. Changes in prac-tices and procedures essentially have to besystem-wide to be effective. Such coordina-tion is incompatible with significant levels ofautonomy of the kind associated with shopfioor employee decision making. It is compat-ible with the system-wide process of collectivebargaining, however.

In short, the scale and scope of UPS's busi-

ness demand a level of coordination that is in-compatible with individual employee involve-ment and a "high commitment" approach.UPS substitutes a system of unusually strongmaterial rewards and performance measure-ment to provide alternafive sources of mofiva-fion and commitment. Having historically onehub at FedEx meant that there were fewer co-ordination problems, allowing considerablescope for autonomy and participafion in shap-ing work decisions at the work group leveland more cif a "high commitment" approach.

Food and Beverages

Few products appear to be more similar thansoft drinks, yet "The Cola Wars" that markedthe product market competition betweenCoke and Pepsi show how even organiza-tions with highly similar products can be dif-ferentiated by their business strategies.

Coke is the most recognized trademark inthe world. First marketed some 70 years be-fore Pepsi, Coke has been a part of Americanhistory and culture. In World War I, for ex-ample, Coca-Cola .set up bottling plants in Eu-rope to supply the U.S. forces. With suchenormous market recognition. Coke's busi-ness strategy centers on maintaining its posi-fion and building on its carefully groomed im-age. Compared with cither companies its size,Coca-Cola owns and operates few venturesbesides Coke (especially now that its brieffiing with Columbia Pictures is over) and hasrelatively few bottling franchises with whichto deal. Indeed, the largest franchisee, whichcontrols 45 percent of the U.S. market, isowned by Coca-Cola itself.

Given its dominance, the Coke trademarkis akin to a proprietary technology, and Coca-Cola's business strategy turns on subtle mar-keting decisions that build on tht- Inidemark'sreputation. This is not to suggest that runningCoke's business strategy is easy. Rather, thedecisions are highly constrained within aframework ot past practices and reputation.(One of the reasons that "New Coke" wassuch a debacle, it can be argued, was that itbroke away from the framework representedby Coke's tradition.)

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History as Influence

What determines the Investments in particu-lar employment practices in the first place isa fascinating question. Often, the differencesin practices seem to t>e associated with theperiod when the organization was formed.UPS, for example, was founded in 1907when ttie scientific management model foreffective work organization was in full bloom.Federal Express, in contrast, was founded in1971 when job enrichment and work reformprograms were the innovations taught in ev-ery major business school. Similarly, com-panies like Sears (founded in 1886) grew upin the period where top-down, command-and-control systems of work organizationdominated American industry. While Nord-strom began as a shoe store in 1901, It didnot sell apparel until 1966 and became a ma-jor organization some time later, wtien moredecentralized management structures be-came popular.

In the pairs discussed here, the oldercompanies are the ones with employmentpractices that invest in their employees.Whether the different practices of the newermember of the pair resulted simply fromgrowing up in a different period (i.e.. FederalExpress) or from a need to differentiate itselffrom the more established competitor (i.e.,Pepsi), or both is an open question.

Managing Coca-Cola therefore requires adeep firm-specific understanding and a "feel"for the trademark that cannot be acquiredoutside the company-—or even quickly insideit. What Coke does, then, is build an employ-ment system that both creates those skills andhangs onto them. Coke typically hires collegegraduates—often liberal arts majors andrarely MBAs—with little or no corporate ex-perience and provides them with intensivetraining. Jobs at Coke are very secure. Ade-quate performers can almost count on lifetimeemployment, and a system of promotion-from-within and seniority-based salary in-creases provides the carrot that keeps em-ployees from leaving. The internal companyculture is often described as family-like. Deci-sion making is very centralized and there is

little autonomy and a low tolerance for indi-vidual self-aggrandizement: No one wants anunsupervised, low-Ievel decision backfiringon the trademark. To reinforce the centralizedmodel, performance is evaluated at the com-pany or division level.

Coca-Cola slowly steeps its new employ-ees in the company culture—in this case, anunderstanding of the trademark's image. Thepeople management system then ensuresthat only career Coke managers who havebeen thoroughly socialized into worryingabout the company as a whole get to makedecisions affecting the company.

Perhaps the main point in understandingPepsi is simply that it is not Coke. Pepsi hasprospered by seeking out the market nicheswhere Coke is not dominant and then differ-entiating itself from Coke. From its early posi-tion as a price leader ("Twice as Much for aNickel") to contemporary efforts at finding a"NewGeneratit)n" of consumers, Pepsi cleansup around the wake left by the Coke trade-mark.

Pepsi has found new markets by becom-ing highly diversified. Its fast food opera-tions—Taco Bell, Pizza Hut, Kentucky FriedChicken—provide proprietary outlets forPepsi soft drinks. Pepsi markets more aggres-sively to institutional buyers like hotels andrestaurants than does Coke, which is focusedon individual consumers. Pepsi also has manymore bottling franchises that operate withsome autonomy.

Given this strategy of operating in manydifferent markets, Pepsi faces a much morediversified and complicated set of manage-ment challenges. It relies on innovative ideasto identify market niches, and it needs theability to move fast, its people managementsystem makes this possible. Pepsi hires em-ployees with experience and advanced de-grees—high-performing people who bringideas with them. In particular, Pepsi brings inniort' advanced technical skill.'̂ . Once in thecompany, Pepsi fosters individual competi-tion and a fast-track approach for those whoare successful in that competition. The com-pany operates in a much more decentralizedfashion with each division given considerable

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autonomy, and performance is evaluated atthe operating and individual levels. The re-cent restructuring has moved toward furtherdecentralization and introduced the "Share-power" stock option program designed topush entrepreneurial action down to individ-ual employees.

Pepsi employees have relatively little jobsecurity, which is accentuated by the absenceof a strong promotion-from-within policy.One Pepsi insider commented: "Wheneveranybody is either over 40 or has been in thesame Pepsi job for more than four or fiveyears, they tend to be thought of as a littlestodgy." In part because of higher turnover,Pepsi employees have significantly less loyal-ty to the company than do their counterpartsat Coke. Indeed, the main issue that unitesthem, some say, is their desire to "beat Coke."

What Pepsi gets from this system is a con-tinuous flow of new ideas (e.g., from experi-enced new hires), the ability to change quick-ly (e.g., hiring and firing), and the means forattacking many different markets in differentways (e.g., decentralized decision makingwith individual autonomy).

CONCLUSIONS

Our paired comparisons uncover clear pat-terns in the relationships between businessstrategies and employment practices. Organi-zations that move quickly to seize new op-portunities compete through flexibility anddo not develop employee competencies fromwithin. It does not pay to do so. Instead, theseorganizations rely on the outside market totake in new competencies, individualism tosustain performance, and the outside marketto get rid of old competencies. Organizationsthat compete through their dominance in anestablished market or niche, on the otherhand, rely on organization-specific capabili-ties developed internally and group-wide co-ordination.

Exhibit 1 illustrates the relationship be-tween the way in which human resourcecompetencies are generated and the businessstrategies that flow from them. The "flexibili-

EXHIBIT 1HR COMPETENCIES AND BUSINESS STRATEGIES

HRCompetencies

BusinessStrategies

Flexibilitv

"Out.skit"Development

"Inside

EstablishedM;irkeis/Nit:lie.s

Raidcr.sBCGA.I.G.Pe[-)si

—

—

49crsMcKinsev

Chubb'Coke

ty" dimension is associated with "prospec-tors"—companies that seek first-mover ad-vantages in attacking new markets or quickresponses to changing customer preferences.The "established markets" category is linkedto classifications like "defenders," firms thatmaintain stable market niches. The most in-teresting part of the chart is the absence ofcases in the off-diagonal quadrants. It is diffi-cult to think of companies with a tradition ofinternal development that are known fortheir flexibility in response to markets or oneswith reputations for outside hiring that havethe kind of proprietary competencies associ-ated with established products and market.

There may well be a natural equilibriumin the marketplace between the flexible andestablished market firms. Companies likePepsi and A.I.G. exist in part because theyhave competitors like Coke and Chubb thatdo not (perhaps cannot) adapt quickly to newopportunities; similarly, companies likeMcKinsey succeed because their competitorscannot easily match the depth of competen-cies and long-term investments that theyhave established.

One factor that helps sustain this equilib-rium is the difficulty in changing strategies.Historical investments in a particular ap-proach create considerable inertia and repu-

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tations that, in turn, affect employee selectionlong after those investments have been ex-hausted. Going from an "inside" employmentstrategy to a market or "outside" approach,and in turn from the "established market" tothe "flexibility" quadrant in business strategy,can probably be done more easily than the re-verse (i.e., discarding the firm-specific assetsand going to the market for new ones).

General Electric under jack Welch mayrepresent one of the more successful attemptsto make such a change in HR competenciesand in business strategy, and even there it hastaken about a decade. It is very difficult, how-ever, to find examples of mature firms thathave gone from a market approach to an in-side employment strategy. Start-up firms andthose that are growing rapidly have no choicebut to rely on a market approach to get staff,and some of these firms eventually switch toan inside strategy. But that is not the same asthe transition from outside to inside for ma-ture firms.

The fact that employment practices are sodifficult to change and transfer helps explainthe basic notion that core competenciesshould drive business strategy and not viceversa: It may be easier to find a new businessstrategy to go with one's existing practicesand competencies than to develop new prac-tices and competencies to go with a new strat-egy.

Companies that secure skills and compe-tencies in the outside market, on the otherhand, are pursuing a strategy that is not diffi-cult to reproduce. And if these competenciesare in fact available to everyone on the openmarket, how can they generate a unique com-petency and competitive advantage for anyone firm? One answer is that a firm may bebetter at spotting talent on the open market orat managing that talent than are those com-petitors that are also trying to secure skills andcompetencies directly from the market. TheRaiders' player management, for example,has been particularly good at incorporatingand accommodating talented players whohave trouble playing effectively under othersystems. The fact that BCG is able to hire newconsultants at salaries somewhat below those

of its leading competitors suggests a compe-tency in recruiting—an ability to identify un-derpriced talent and/or job characteristics thatsubstitute for salary.

The Need for Change

The increase in the need for flexibility andchange, pressures that virtually all firms feel,may be exacting a toil on employers that de-velop their own competencies. Competitivepressures may be pushing more of them to-ward the "outside"./"flexibility" quadrant.UPS, for example, did not mount an overnightdelivery business until 1982, despite 10 yearsof lessons from FedEx that customers wouldpay almost twice as much for it. It also delayedautomating its operations until 1M86. It wasalso slow to develop modern computer andinformation systems because it did not havethe skills in-house to build them and no expe-rience in getting such skills on the outside.

A portion of IBM's recent troubles hasbeen attributed to its inability to respond tochanging markets, due in part to a lack of newtalent and ideas from the outside. Sears' high-quality but high-cost sales force became a dis-advantage when it confronted competitionfrom low-cost discounters that sold reliablebrand-name products. Its delay in restructur-ing its operations despite a decade ot declinehas been attributed in part to inbred manage-ment. Companies like Coca-Cola and McKin-sey have begun to take in more talent fromthe outside, and schools like Wharton thattraditionally supplied functional skills havechanged curricula to ensure that their gradu-ates are broader and more flexible. The in-creased need for flexibility may erode themarket niches mined by firms with high com-petencies and specific skills like Chubb. Per-haps these firms will find lower cost ways ofcreating the necessary competencies in the fu-ture, possibly assembling them from the out-side market.

Whether firms with highly skilled, broad-ly trained employees can be more flexible intheir product markets than firms that hire-and-fire to change their competencies is animportant empirical question. The former

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may well be better at creating flexibility with-in their current product market (e.g., "quickresponse" or customized production) al-though the latter may achieve more flexibilityin moving across product markets.

Public policy discussions about changingemployment practices in the nation as awhole—increased levels of employer invest-ment in skills or introducing "high perfor-mance" systems of work organization—mustbe thought through very carefully in light ofthe above arguments. Mandated changes inemployment practices could well alter thecompetencies of organizations and their busi-ness strategies. Some might argue thatchanging business strategies is a desirableoutcome. The constraints on dismissing em-ployees in European countries, for example,encourage investments in existing employeesand, it is argued, shift production toward thehigher quality (and higher cost) markets thatmake use of higher skills. But they may alsodrive out of business firms that rely on first-mover advantages based on very high levelsof internal flexibility. The fact that distinctiveways of competing appear to be driven bycompetencies and capabilities that are creat-ed by unique sets of employee managementpractices helps explain the long-standing

puzzle noted earlier: Why is there so muchvariance in management practices? Evenpractices that appear to have been demon-strated to be "best" in some firms never seemto sweep over the business community as awhole.

None of this suggests, of course, that allpractices are equally good. For practices thatare not central to an organization's core com-petency, there may indeed be best practicesthat clearly cut across firms; for companieswith similar business strategies, hence similarcore competencies, it may also be possible toidentify management practices that domi-nate others—"lean production" among autoassemblers, for example. But it should comeas no surprise that variety in employmentpractices, as in other aspects of life, can be asource of distinctiveness and Ci)mpetitive ad-vantage.

If you wish to ohlciin reprintsof Ibis or other articles in

()mi.VMZ.\Ti<).\.\i. Dy\A\ii{\ pleaserefer to tbe reprint instructions on

page 80 or call (800) (yi4-2464.

The work reported herein was supported under the Educational Research and Deivtopment Center pro-gram, GgrccitH'iit iintiibcr R117Q00() 1 /-9, CFDA H4.117Q ds niinii}ii^teri-d by the Office of Educatio]mlResearch and hiiprovenieut, U.S. Department of Education. The findings ami opinions expressed in thisreport do not reflect the ^losition or policies of the Office of Educational Research and Improvement or theU.S. Department of Education. We are indebted to representatives and employees of the companies dis-cussed here for information about their strategies and employment practices and to our colleagues at the

Wliarton School for their helpful comments.

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SELECTED BIBLIOGRAPHY

Resource-based arguments in the strategyfield suggest that Ihe source ol competitiveadvantage lies within the firm, not in how itpositions itself with respect to the market. SeeRobert M. Grant, "The Resource-Based Theo-ry of Competitive Advantage; Implicationsfor Strategy Formation," California Mannge-ment Review, Vol. 33, 1993. Among the mostinfluential of the resource-based argumentshas been C.K. Prahalad and G. Hamel, "TheCore Competence of the Corporation," Har-vard Business Review, May-June 1990, whichsuggests that the key resource of a firm lies onthe procedural side. Several articles documentdifferences in human resource practicesamong otherwise similar firms. One of themost interesting of these sees the differencesas relating to business strategies: Jeffrey B.Arthur, "The Link Between Business Strategyand Industrial Relations Systems in American

Steel Minimills," Industrial and labor RelationsRexnciv. Vol. 45,1992.

Among more behaviorally oriented re-search, many studies find that the process ofselection may create distinctive organization-al characteristics. See Ben Schneider, "ThePeople Make the Place," Personnel Psychotogi/,Vol. 40,1987.

Evidence about the organizations de-scribed in this article often included pub-lished material. Interesting evidence explain-ing the link between employment strategiesand business needs at Sears is reported inDave Ulrich, Richard Halbrook, Dave Meder,Mark Stuchlik, and Steve Thorpe, "Employeeand Customer Attachment: Synergies forCompetitive Advantage," Human ResourcePlanning, Vol. 41, 1992. Complete referencesfor the ct)mpany material presented in thispaper are available from the authors.

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