Edición 59, Human Resources

From Human Resource Management to Human Capital Management: A Model of Human Capital Management

direccion_estrategicaPor: Luis González Fernández,
Universidad de Salamanca

“If I could ignore for 8 minutes of arc I would adapt my hypothesis, but as I cannot ignore them, those 8 minutes alone with lead us along a path to the reform of the whole of Astronomy,” wrote Johannes Kepler when he submitted his hypothesis of perfect solids to Tycho Brahe’s observations of the orbits. And he did not ignore them, but by joining observation and theory he built the foundations that explain the orbits of the planets around the sun. The theory of company organization and management can no longer ignore, as collateral and minor, the employee’s behavior at the moment of explaining how the company achieves a competitive advantage and sustains it over time. Just as those 8 minutes of arc led to a reform of astronomy, incorporating employee behavior into management as a central element leads to a revolution in business management and, more specifically, in human resource management. This revolution is known as “micro-foundations of administration.” This micro-foundation of management implies integrating the micro aspects (employee behavior) with the macro aspects (company strategy). The model of human resource management presented below integrates these two components by placing the employee’s behavior at the core or, to be exact, the variables, processes and theories that explain the different aspects of that behavior. In addition, compared to the classic proposals that separate the behavior at work from its determinants (knowledge, abilities, skills and other characteristics), the model that we present integrates them as interrelated elements in an expanded conception of human capital that can be placed at the base of the mechanisms with which to obtain a competitive advantage for the company.

Dimensions of Human Resource Management

An analysis of human resource management allows one to define the essential dimensions that characterize it, among which are the following:

  • Conception of the employee
  • Way of acting
  • Strategic perspective

The progressive replacement of the personnel division by human resource management is determined in large part by the change in the company director’s conception of the employee. It is no longer considered a cost that must be minimized; rather it must be understood as one of the most valuable resources that the company has to achieve its objectives. Human resource management is no longer oriented toward reducing staff costs, but all its activities are directed toward the optimal use of this resource.

The second dimension refers to the mode of action in human resource management, which must be essentially proactive. The activities of human resource management are integrated into policies and programs with multiple interrelationships and interdependencies, in order to anticipate and facilitate the achievement of the company’s objectives. This is what today is called “horizontal adjustment” of human resource management.

The third dimension is the strategic perspective of human resource management. The strategy in human resource management may refer to a way of acting, to the process of relating human resource management to the company strategy or to the mechanisms by which human resource management contributes to obtaining and maintaining a competitive advantage.

Strategic Human Resource Management

A great variety of theoretical frameworks have been proposed to foster strategic human resource management. Of all of them, the theory of resources and skills is the most accepted.

The resource-based view or theory of resources and capabilities stipulates that companies are different, heterogeneous, in terms of the resources they have and the capabilities they acquire from the combination of resources, and that it is precisely in these resources and capabilities where its sustainable competitive advantage is found.

An organization, a company, is seen as a system or configuration integrated by objectives and values, a set of resources and capabilities necessary to compete in the market, structures and a strategy in a concrete environment. The resources are the factors, the assets, the inputs that the organization owns and controls and that intervene in the production of goods and services. The capabilities are the dynamic mechanisms that allow the company to perform an activity by integrating the resources to achieve a performance that is superior to its competitors. The combination of resources and capabilities generates organizational competencies; that is, that which the organization is able to do with a performance that is superior to its competitors.

Resources can be classified in many ways. One of the main classifications is to divide them into tangible and intangible resources. Tangible resources are those that have physical support, such as machines, facilities, tools, financial capital, etc. They are easy to identify, value and integrate into the company’s financial statements. The objective of the management of these resources must be the optimal use by the company. In addition to tangible resources, the company also owns and controls intangible resources that do not have a clear physical support, such as patents, brands, culture or human capital, among others. Unlike tangible resources, intangibles are difficult to identify, value and incorporate into company accounting. Among the intangible resources of the company is human capital.

Human capital differs from other resources of the company in its composition, as it has two components of which one is a necessary condition and the other condition is sufficient to generate value for the company. That is, mere possession of the resource will not generate value automatically. These two components are, on the one hand, the set of knowledge, abilities, skills, etc. the company needs to achieve its objectives. It involves a component of competencies, since the company needs to equip itself with this set of elements that the employees possess to reach its objectives. However, possessing these elements is not enough to generate value in the company. It is necessary that they become behavior. That is, the employee must develop a certain behavior. This is the second component of human capital, a dynamic flow component. The two components are inseparable; to develop the behavior that allows the company to obtain a sustainable competitive advantage, employees must have certain knowledge, skills, abilities, etc. Likewise, the possession of this knowledge, abilities, skills, etc. does not generate value for the company if it is not transformed into a certain behavior.

Finally, we must highlight another of the characteristics of human capital that is directly related to the mechanisms of obtaining a competitive advantage. The mere possession of a base of knowledge, abilities, skills, etc. does not automatically become the behavior that the company needs. It is necessary to manage this human capital to obtain it. Therefore, strategic human resource management must allow the company to equip itself with human capital and turn it into flow, in the behavior that it needs to reach its objectives. This double composition of human capital is graphically represented in Figure 1.

According to the theory of resources and capabilities, in order for resources and capabilities to generate a sustainable competitive advantage, ie, to be considered as strategic, they must possess a series of characteristics. In this sense, in order for a resource or capabilities to generate a competitive advantage for the company it must have value. This value depends on two conditions, the scarcity in the market of the resource or the capabilities, or if there is no scarcity, the limited availability among the competitors. Possessing a range of valuable resources and capabilities generates a competitive advantage for the company. Maintaining this advantage depends on other characteristics, among which are: durability, inimitable, irreplaceable and non-transferable.

Figure 1: Human Capital and its Components

Deciding factors of organizational behavior

Organizational behavior

Intangible resources and capabilities, including human capital, have these characteristics, so they are strategic resources and conform organizational competencies, that is, what the organization does better than its competitors. These organizational competencies should be articulated with the organization’s strategy based on the characteristics of the environment, which ultimately determines the attainment of a sustainable competitive advantage.

Strategic human resource management, through configurations or systems of practices of high performance that constitute the capabilities of human capital management, endows the company with a human capital base and transforms it into a behavior. Figure 2 shows this scheme of strategic human resource management and its action on human capital through human resource management capabilities. Human resource management practices provide, develop and maintain the company with human capital that has a set of characteristics (knowledge, abilities, skills, etc.) and certain behavior (motivation, commitment, performance, etc.) susceptible to becoming a strategic asset for the company. Human resource management practices create dynamic structures capable of becoming a strategic asset and generating a sustainable competitive advantage.

Structure and functions of human resource management

One of the first aspects that must be analyzed in human resource management is the structure of this function within the organization. The analysis of the structure of human resource management has to address both its articulation within the organizational structure and its internal composition.

In relation to the first element, the articulation of human resource management within the organization, there is no structure that is valid for all companies. Each company must define the best way to articulate human resource management once the contingencies of each organization have been assessed. Three basic elements must be taken into account: the management model, the size and the structure of the company.

With regard to the size of the company, determined by the number of employees, three broad categories are usually demarcated: small, medium and large enterprises. As for the organizational structure, we will consider the basic modes of functional, divisional and matrix structure. The most frequent ways of articulating human resource management according to the size of the company are: small company (external counseling or consulting); medium size company (internal consulting or functional structure) and large company (internal consulting, functional structure, divisional, matrix or a combination of any). This does not mean that another articulation is not possible, always depending on the objectives, strategy and contingencies of each organization.

Figure 2: Strategic Human Resource Management

External counseling or consulting is the most common form of articulation in small businesses. Given that the volume of human capital management is very small in these companies, it is common practice to outsource human resource management. An external counsel or consultant conducts or overseas all human resource management. Therefore, it is a mode of articulation with an unspecific, very generic response and with a limited cost. However, it is important to emphasize that there must always be human resource management. The fact that the size of the company and, consequently, the volume of human resource management and the financing capacity of the company are very small does not mean that there should not be a specialized response. This can be done through organizations such as business or government associations that offer this consultancy to small businesses.

The most common way of articulating human resource management in medium size companies is internal consulting. The volume of human capital management and the financial capacity of the company make it advisable to incorporate a specialized structure in human resource management. In this way, a specific, very specialized management is achieved and without great costs. Internal consulting is situated as a satellite between the management of the company and the different departments. Internal consulting establishes the objectives and human resource management strategies, designs the programs and combines their execution, with the advice and guidance of the line supervisors.

The medium-size company may also opt for a mode of articulation with a functional structure. In this case, human resource management is integrated as one more function within the management structure of the company. In this way, a high degree of specificity and specialization is achieved in the responses to human resource management needs. However, the cost is higher than internal consulting.

The large company, given its volume of human capital management needs and its financial resources, can opt for all the alternatives and even frequently combine several. In addition to internal consulting, articulation through a functional structure, it can also resort to a mode of articulation divisional or matrix. The divisional mode increases the degree of specificity and speed of responses in human resource management. However, there may be problems of coordination and integration of management practices between the divisions of the same human resource management strategy. The cost is also higher than the functional structure.

Figure 3: Practices of Human Resource Management

Finally, the matrix structure, which arises from the combination of a functional structure and a divisional structure, is the way of articulating human resource management in the company that provides with greater speed the most specific, specialized, coordinated and integrated responses within the same strategy. In return, it is also the most costly for the company and frequently generates conflicts of activities between those responsible for human resource management. The internal structure of human resource management can also take a variety of forms, such as functional, divisional, matrix or mixed, although (as in the case of the articulation of human resource management with the structure of the organization) it will depend on the objectives, strategies and contingencies; the most frequent international structure is the functional one. Depending on the objectives and strategy, as well as the size of the organization, human resource management will have units specialized in different practices, such as job analysis and performance selection or evaluation, to cite two examples. As we have pointed out, strategic human resource management acts on human capital through activities or practices, as shown in Figure 3.

Human Capital

As we have seen, human resource management acts on human capital to obtain a sustainable competitive advantage. Human capital, unlike other assets of the company, has two inseparable components that constitute the necessary and sufficient condition for employees to adopt a behavior that, in line with the company’s strategy, allows the possibility of obtaining and maintaining a competitive advantage. The first of these components is the set of competencies, that is, the knowledge, abilities, skills, etc. that the employees of a company have and that are necessary to exhibit certain behavior. The second component refers precisely to that behavior that the employee cannot cultivate if he/she does not have certain knowledge, abilities, skills, etc. This transformation is not automatic or mechanical, but requires the management of human capital. In other words, the mere possession of a set of knowledge, abilities, skills, etc. does not assure the company that its employees will exhibit the necessary behavior. It is a necessary condition, but it is not sufficient. This asset must be managed, and human resource management is responsible for this. All its activities, which constitute mechanisms for the integration of this resource and therefore can be conceptualized as capabilities, are aimed at providing the company with a human capital base and facilitating the transformation of this base into behavior.

Given the characteristics of human capital, to manage it, it is essential to know the scientific bases that explain its elements. That is, to know the theoretical models and tools which allow their evaluation and management. This behavior responds to the same laws and processes of any human behavior, but occurs in a very concrete environment: the organizations.

The rigorous and scientific management of human resources, not based on implicit beliefs or common sense, requires a deep and scientific knowledge of human capital. This knowledge is the foundation and the starting point of human resource management, without which it is not possible to carry it out efficiently. An example will help us illustrate and understand the importance of human capital knowledge in human resource management. A human resource director could not properly develop a motivational program for the employees of a high performance team if he/she does not know the theoretical bases and tools of motivation. Guided by intuition, by beliefs that are almost always wrong, leads only to the failure of programs and, which is much more serious, to a progressive loss of commitment of the employees with the company project, which has a direct impact on the results of the organization.

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