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Saturday, February 16, 2013

Retaining Competitive Advantages through Specialized Human Capital



Organizations seek to develop uniqueness that will allow them to create competitive advantages that allow them to better compete on international markets. The combination of human capital and organizational factors helps develop those firm specific qualities. The development of human capital through firm-specific skills will further retain the talent of organizational members and encourage lower levels of knowledge loss or competitive posturing.

Competitive advantage is a unique organizational strength a company develops over competitors through the offering of higher products, value, or benefits that justifies higher prices on the market. It is a condition whereby an organization is more efficient and productive than those it competes with. Such firms are seen as competitive, “if it is able to create more economic value than the marginal competitor (Peteraf & Barney, 2003: 314). Through this competitiveness, additional benefits are earned by the organization that other companies have a hard time emulating. 

Competitive advantage can be found in the development of human capital within an organization. Such competitive advantage comes from employee skills and abilities that cannot be easily passed from one firm to another (Kor & Leblebici, 2005). Thus skills and abilities help employees work in patterns and methods that other organizations will have difficulty time copying without copying all of the unique aspects of the firm.

Skills and abilities can be developed within other organizations which reduces the overall competitiveness of the subject firm. However, even though such skills apply to other firms their true value lies in their combination of technology, product markets and assets (Teece, 1986). Such firms are able to combine the various components that create uniqueness in order to develop new market strengths. It is this combination of strengths that is difficult for organizations to develop without significant research, cost and energy.

To develop competitive advantage through human capital it is important to see employee skills as a total portfolio that fosters firm strength. Some skills are general while others are more firm specific (Lazear, 2009). It is the firm specific skills that have the highest value and exchange rate with the organization. It is through the development of employee skill specificity that organizations can not only create competitive advantages in human capital but also the ability to retain such capital due to its value being tied to the firm. 

Let us take an example. Two employees are seeking higher paychecks. Each has their own particular portfolio of skills and abilities. The organization that understands the unique skills and abilities of their employees can combine other assets to drive higher levels of unique competitive advantages. In this example, employee 1 has skills that are unique to the firm while employee 2 has skills that are more general. Employee 1 is likely to be retained by the firm because their skills are non-transferrable. Employee 2 can apply their skills wherever they decide to work and are more likely to move to another company. 

Firm specific capital is difficult to transfer to other companies (Hashimoto, 1981). The more specialized the employee and their abilities the less opportunity they have to move to a competitor and obtain comparative wages and income. This specialization makes their value worth more to the home firm where they are likely to be paid the highest rate of income. 

Developing competitive advantages means combining the organizations unique qualities with available human capital to develop strengths that other firms cannot copy. Organizations that develop specific firm related skills are less likely to lose this intellectual capital to other companies that do not have the same needs. General skills provide appropriate foundations for human capital development but can be easily transferred from one firm to the next. Employees will also desire to retain employment as their firm specific skills have the highest exchange rates of value. To develop stronger competitive advantages requires the ability to take general skills and foster firm specific skills that have the highest competitive advantage for both the employee and the company by retaining employment.

Hashimoto, M. (1981). Firm-specific human capital as a shared investment. American Economic Review, 71: 475–482.

Kor, Y. & Leblebici, H. (2005). How do interdependencies among human-capital deployment, development, and diversification strategies affect firms’ financial performance? Strategic Management Journal, 26: 967–985.

Lazear, E. (2009). Firm-specific human capital: A skill weights approach. Journal of Political Economy, 117: 914-990.

Peteraf, M. & Barney, J. (2003). Unraveling the resource based tangle. Managerial and Decision Economics, 24: 309–323.

Teece, D. (1986). Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy. Research Policy, 15: 285–305.



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