Strategic Human CapitalA New Construct Presented in

Three Acts

Craig Armstrong

Your Department

University of Alabama

Influences

The Acts

• Theory – A new construct?

• Propositions – Developing strategic human capital in simulations

• Empirical Tests – hypotheses, data, methods, and results!

Act 1

Strategic human capital: Promises and perils of a new

construct

Complimentary Hay

Overview

• Central constructs and model of strategic human capital (SHC)

• Human capital theory

• Model of strategic human capital

• Research settings (“promises”)

• Measurement issues (“perils”)

Central constructs of SHC

• Human capital• Social capital• Human resource management practices• Competitive advantage• Important but viewed as contingencies for

now:– Firm strategy– Institutional / political forces

Human capital theory

• Origins: Knowledge, skills, abilities that can be increased through education, training, and experience to produce an income (Becker, 1964)

• Human capital-based advantage occurs when “greater economic value” is derived from firm’s stock of human capital

• “HC-based competitive advantage requires attracting, retaining, and motivating employees with valuable human capital at an economic discount relative to competitors” (Coff & Kryscynski, 2011)

Human capital theory

• Distinguishes firm-specific HC (knowledge with limited value outside firm, Wernerfelt, 1984) from general HC (a tradable asset, Becker, 1983; Castanias & Helfat, 1991)

• Consists of competencies and behaviors (attracting, retaining, motivating)(Wright, McMahan, & McWilliams, 1992)

“Talent”

• McKinsey and Company argued in 1997 that there was a “war for talent” based on firms’ realizations that the most valuable intangible asset is talent.

• Not just any talent – better talent separates winners companies from the rest (emphasis in original).

• E.g. in the manufacturing industry that the best plant managers grew profits by 130% while the lowest performing managers achieved no profit growth improvement.

“Stars”

• Stars : “Top performers who are disproportionately productive and valuable and a form of human capital that organizations must attract and retain” (Ernst & Vitt, 2000; Hunter, Schmidt, & Judiesch, 1990; Narin & Breitzman, 1995)

• Superstars: “Relatively small numbers of people who earn enormous amounts of money and dominate the activities in which they engage” (Rosen, 1981)

Strategic human capital defined

• “A workforce that is highly educated, that exhibits organization-specific competencies and experience, and that is valuable, unique, and imperfectly imitable” and strategically important (Carmeli, 2004)

• Four dimensions: education level, job experience, competence of individuals, and VRIN of workforce (Carmeli, 2004)

• Still a macro-level construct because it aggregates HC of entire workforce and ignores interactions

Strategic human capital redefined

• “Extraordinarily productive and valuable individuals employed by a firm who are capable of contributing disproportionately to that firm’s competitive advantage.” Why?

1. Recognizes differences in “VRIN’ness” and ∴ contributions to CA among individuals within a firm’s stock of HC

2. Provides micro-foundations focus needed for study of individuals and interactions with each other (Coff & Kryscynski, 2011; Foss, 2011)

3. Focuses on attributes of specific individuals who most directly influence firm performance and have greatest access to appropriate excess profits (Coff, 1997)

Strategic human capital redefined

• “Extraordinarily productive and valuable individuals employed by a firm who are capable of contributing disproportionately to that firm’s competitive advantage” Why?

4. Recognizes how SHC is causally ambiguous, socially complex, and firm-specific, and ∴ source of both CA and management dilemmas (Coff, 1997, 1999, 2001; Coff & Kryscynski, 2011)

5. Draws from lit. on “stars” (Groysberg & Lee, 2009), talent management, rent generation/appropriation, reputations, HR, managerial development

StrategicHumanCapital

SocialCapital

CompetitiveAdvantage

SHRMpractices

SHC Framework

FirmStrategy

Institutional / political forces

Social capital

• “An asset embedded in relationships”• Nontradable, private good that individuals

“spend” to improve their situations• Why it’s part of the model:

– Provides access to resources and opportunities– Must be managed appropriately to derive value– Intrafirm SC positively related to firm performance,

negatively related to turnover– Individuals must be motivated to develop and use SC to

firm benefit

Human resource management practices

• HR defined: “the pool of human capital under the firm’s control in a direct employment relationship”

• HR Management attempts to develop and control competencies as well as behaviors through selection, training, compensation, and retention.

• Human resource management practices are the organizational activities directed at:– managing the pool of human capital and– ensuring that the capital is directed toward the

fulfillment of organizational goals

Strategic human resource management

• The management is strategic, not the human resource• SHRM systems may help firms increase efficiency

in their chosen strategies, but the systems are chosen to fit with a strategy rather than to provide sustained advantages in and of themselves (Coff & Kryscynski, 2011)

• Either redefine the term or offer a contingency that recognizes differences in recruiting, developing, retaining, compensation, and motivating SHC versus generic HC (e.g., McKinsey & Co, 2001)

Firm strategy and Competitive advantage

• Firm strategy: create and capture value through differentiation from competitors

• Competitive advantage:– Occurs “when a firm is implementing a value creating

strategy not simultaneously being implemented by any current or potential competitors” (Barney, 1991: 102)

– CA requires resource heterogeneity (variance across firms) and immobility (inability of firms to obtain resources from other firms or markets)

– SHC emphasizes how firm-specific skills from one firm are only “second-best” value at poaching firm

SHC Behaviors?

Evidence of promise for the study of SHC

• Firm ownership decreases turnover and increases investment in firm-specific HC (Hitt et al, 2001; Pennings et al, 1998)

• Better understanding of isolating mechanisms (e.g., Coff & Kryscynski, 2011)

• Mergers and acquisitions destroy HC, especially SHC• Effect of SHC on diversification and expansion• Organizational decline – decrease investments in training,

continue same selection processes• Explain relationship of firm size to other constructs and

variables (span of authority, geography, compensation)

Promises for SHC study:Contribution opportunities

• Why does poaching persist despite evidence of comparatively diminished value of acquired SHC?

• Why do declining organizations hire outside CEOs? (both outside firm and industry)

• How does firm-specificity of strategic talent lead to insider information trading?

• Why do “stars” engage in behaviors that destroy value?

Perils• “Human capital–based advantages require multilevel

solutions to address vexing challenges associated with attracting, retaining, and motivating talented employees” (Coff & Kryscynski, 2011), which poses problems of misspecification and aggregation (Armstrong & Shimizu, 2007; Rousseau, 1995)

• Multi-level constructs of HC (Ployhart & Moliterno, 2011) and SC (Leana & Van Buren, 1998)

• Differentiating between HC and SHC, HRM and SHRM

Act 2

Developing strategic human capital: Can one bad apple spoil

the whole bunch?

HC attributes• Firms must attract, develop, and retain talented

human capital• Human capital can be a critical resource for pursuit of

CA (rare, socially complex, difficulty to imitate)• But also mobile and difficult to manage behaviors

(hubris, rent appropriation)• Dedicating a portion of a firm’s most talented

managers toward the development of strategic human capital in junior employees requires senior employees to behave altruistically for the benefit of the firm.

NetLogo Models

Equal proportion of selfish and altruistic individualsCost of altruism is equal to benefits

NetLogo Models

Equal proportion of selfish and altruistic individualsBenefits of altruism 5X greater than costs

NetLogo Models

Equal proportion of selfish and altruistic individualsBenefits of altruism 3X greater than costsModerately harsh conditions

NetLogo Models

3X greater altruists than selfish individualsBenefits of altruism 4X greater than costs

Propositions

Benefits/cost of altruistic

development of SHC

SHC dominated by selfish

individuals

SHC dominated by altruistic

individuals in the long term

high

marginal

Harshness of environment

U

UP1

P2

P3: Relationship in P2 is really sensitive to B/C

Conclusions

• In direct contrast to the received wisdom, developing strategic human capital through altruistic behaviors benefits, rather than harms, shareholders in the short-term, and harms, rather than benefits, shareholders in the long-term

• Firms ensure large multipliers of benefits relative to costs and punitive measures for individuals who engage in selfish behaviors

• Otherwise, shareholders are denied the benefits of a firm with a resource-based advantage

Act 3

Which types of human capital are strategic? Evidence from NCAA

football in the Southeastern Conference

Riddle me this, Mr. Commodore!

Theory

• Building from the first two “Acts:”– Firm-specific strategic human capital is more

valuable than general human capital or industry-specific human capital

– Are there limits to the value of firm-specific strategic human capital and the sustainability of performance?

Hypotheses

• General human capital is positively related to firm performance

• Industry-specific …

• Firm-specific…

• Job-specific…

BGHC < BIHC < BFHC < BJHC

Setting

• Data from SEC football 1933 – 2010 (78 seasons)

• N = nearly 1,000 coach-team seasons

• IV –human capital – head coaches of all SEC football teams from 1933 – 2010

• DV – performance – NCAA and SEC championships, winning percentage

Attributes of human capital

• Years NCAA experience

• Years NCAA head coach experience

• Years SEC head coach experience

• Years focal team head coach experience

• Same attributes as assistant in NCAA

• Same attributes from NFL experience

DV DV

Independent Variable NCAA R 2 * SEC R 2 *sig sig

Years NCAA coaching + 0.047 0.208 + 0.042 0.172Years NCAA head coaching + 0.045 0.208 + 0.002 0.185Years NCAA SEC head coaching + 0.017 0.216 + 0.001 0.186Years NCAA head coach at focal team + 0.093 0.201 + 0.006 0.179

Years NCAA head coach at focal team + 0.002 0.208Years NCAA head coach at focal team squared - 0.023

Years NCAA assistant coach + 0.631 0.189 - 0.381 0.165Years NCAA SEC assistant coach - 0.695 0.189 - 0.212 0.167Years NCAA assistant coach at focal team - 0.608 0.189 - 0.15 0.168

Years NFL coaching - 0.591 0.189 + 0.627 0.164Years NFL head coach - 0.956 0.188 + 0.387 0.165Years NFL assistant coach - 0.925 0.188 - 0.291 0.166

Team is coach's alma mater - 0.305 0.193 - 0.197 0.167

Baseline model without IV 0.188 0.163

* Nagelkerke R 2

DVIndependent Variable Winning Percentage

t sig adj R 2

Years NCAA coaching + 3.711 0.000 0.202 aYears NCAA head coaching + 3.794 0.000 0.202 aYears NCAA SEC head coaching + 5.396 0.000 0.215 bYears NCAA head coach at focal team + 4.495 0.000 0.207 a

Years NCAA head coach at focal team + 3.497 0.000 0.21 aYears NCAA head coach at focal team squared - -1.930 0.054

Years NCAA assistant coach + 0.375 0.206 cYears NCAA SEC assistant coach + 0.248 0.207 cYears NCAA assistant coach at focal team + 0.200 0.207 d

Years NFL coaching - -0.185 0.853 0.207 cYears NFL head coach + 3.070 0.002 0.206 aYears NFL assistant coach - -2.261 0.024 0.206

Team is coach's alma mater - -2.082 0.038 0.206

Baseline model without IV 0.19

b Weaker effect than team effect from Tennesseec All team effects are stronger than this main effectd Weaker than all team effects except Vanderbilt

a Weaker effect than team effects from Auburn, Alabama, Florida, Georgia, Ole Miss, Tennessee, LSU, and Georgia Tech

Next steps

• Mobility / immobility of strategic human capital

• Behavioral affects of strategic human capital (aka “cheating”)

• Role of co-specialized assets in performance of strategic human capital

Grazie mille!

Graduating doctoral students in Italy

Wright & McGahan, 1992