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Chapter Summary

Chapter 4
Firms throughout the industrial world are recognizing that the knowledge worker is the key to success in the marketplace. However, we also recognize that human capital, although vital, is still only a necessary but not sufficient condition for creating value. We began the first section of the chapter by addressing the importance of human capital and how it can be attracted, developed, and retained. Then we discussed the role of social capital and technology in leveraging human capital for competitive success. We pointed out that intellectual capital—the difference between a firm’s market value and its book value—has increased significantly over the past few decades. This is particularly true for firms in knowledge-intensive industries, especially where there are relatively few tangible assets such as software development.

The second section of the chapter addressed the attraction, development, and retention of human capital. We viewed these three activities as a "three-legged stool"—that is, it is difficult for firms to be successful if they ignore or are unsuccessful in any one of these activities. Among the issues we discussed in attracting human capital were "hiring for attitude, training for skill" and the value of using social networks to attract human capital. In particular, it is important to attract employees who can collaborate with others given the importance of collective efforts such as teams and task forces. With regard to developing human capital, we discussed the need to encourage widespread involvement throughout the organization, monitor progress and track the development of human capital, and evaluate human capital. Among the issues that are widely practiced in evaluating human capital is the 360-degree evaluation system. Employees are evaluated by their superiors, peers, direct reports, and even internal and external customers. Finally, some mechanisms for retaining human capital are employees’ identification with the organization’s mission and values, providing challenging work and a stimulating environment, the importance of financial and nonfinancial rewards and incentives, and providing flexibility and amenities. A key issue here is that a firm should not overemphasize financial rewards. After all, if individuals join an organization for money, they also are likely to leave for money. With money as the primary motivator, there is little chance that employees will develop firm-specific ties to keep them with the organization.

The third section of the chapter discussed the importance of social capital in leveraging human capital. Social capital refers to the network of relationships that individuals have throughout the organization as well as with customers and suppliers. Such ties can be critical in obtaining both information and resources. With regard to recruiting, for example, we saw how some firms are able to hire en bloc groups of individuals who are part of social networks. Social relationships can also be very important in the effective functioning of groups. Finally, we discussed some of the potential downsides of social capital. These include the expenses that firms may bear when promoting social and working relationships among individuals as well as the potential for "groupthink," wherein individuals are reluctant to express divergent (or opposing) views on an issue because of social pressures to conform.

The fourth section addressed the role of technology in leveraging human capital. We discussed relatively simple means of using technology such as e-mail and networks where individuals can collaborate by way of personal computers. We also addressed more sophisticated uses of technology such as sophisticated management systems. Here knowledge can be codified and reused at very low cost, as we saw in the examples of firms in the consulting, health care, and high-technology industries. Also, given that there will still be some turnover—voluntary or involuntary—even in the most desirable places to work, technology can be a valuable means of retaining knowledge when individuals terminate their employment with a firm.

The final section addressed how the leveraging of human capital is critical in strategy formulation at all levels. This includes the business, corporate, international, and Internet levels.

Summary Review Questions
1. Explain the role of knowledge in today’s competitive environment.

2. Why is it important for managers to recognize the interdependence in the attraction, development, and retention of talented professionals?

3. Discuss the need for managers to use social capital in leveraging their human capital both within and across their firm.

4. Why are teams so valuable in combining and leveraging knowledge in organizations?

5. Discuss the key role of technology in leveraging knowledge and human capital.

Application Questions and Exercises
1. Look up successful firms in a high-technology industry as well as two successful firms in more traditional industries such as automobile manufacturing and retailing. Compare their market values and book values. What are some implications of these differences?

2. Select a firm in which you believe its social capital—both within the firm and among its suppliers and customers—is vital to its competitive advantage. Support your arguments.

3. Choose a company with which you are familiar. What are some of the ways in which it uses technology to leverage its human capital?

4. Using the Internet, look up a company with which you are familiar. What are some of the policies and procedures that it uses to enhance the firm’s human and social capital?

Ethics Questions
1. Recall an example of a firm that recently faced an ethical crisis. How do you feel the crisis and management’s handling of it affected the firm’s human capital and social capital?

2. Based on your experiences or what you have learned in your previous classes, are you familiar with any companies that used unethical practices to attract talented professionals? What do you feel were the short-term and long-term consequences of such practices?

References

1. Bianco, A. & Moore, P. L. 2001. Downfall: The inside story of the management fiasco at Xerox. Business Week, May 5:82–92; Deutsch, C. H. 2000. Moody’s puts Xerox below investment grade. New York Times, December 2:A1; Deutsch, C. H. 2000. The fading copier king: Xerox has failed to capitalize on its own innovations. New York Times, October 19:B6.

2. This chapter draws upon some of the ideas and examples from Dess, G. G. & Picken, J. C. 1999. Beyond Productivity. New York: AMACOM.

3. Anonymous. 1996. An acknowledged trend: The world economic survey. The Economist, September 28:25–28.

4. Quinn, J. B., Anderson, P. & Finkelstein, S. 1996. Leveraging intellect. Academy of Management Executive, 10(3):7–27.

5. Hamel, G. & Prahalad, C. K. 1996. Competing in the new economy: Managing out of bounds. Strategic Management Journal, 17:238.

6. Stewart, T. A. 1997. Intellectual capital: The new wealth of organizations. New York: Doubleday/Currency.

7. Ibid.

8. Leif Edvisson and Michael S. Malone have a similar, more detailed definition of intellectual capital: "the combined knowledge, skill, innovativeness, and ability to meet the task at hand." They consider intellectual capital to equal human capital plus structural capital. Structural capital is defined as "the hardware, software, databases, organization structure, patents, trademarks, and everything else of organizational capability that supports those employees’ productivity—in a word, everything left at the office when the employees go home." Edvisson, L. & Malone, M. S. 1997. Intellectual capital: Realizing your company’s true value by finding its hidden brainpower. New York: HarperBusiness, especially pp. 10–14.

9. Stewart, T. A. 2001. Accounting gets radical. Fortune, April 16:184–194.

10. Thomas Stewart has suggested this formula in his book, Intellectual capital, op. cit. He provides an insightful discussion on pages 224–225, including some of the limitations of this approach to measuring intellectual capital. We recognize, of course, that during the late 1990s and in early 2000, there were some excessive market valuations of high-technology and Internet firms. For an interesting discussion of the extraordinary market valuation of Yahoo!, an Internet company, refer to Perkins, A. B. 2001. The Internet bubble encapsulated: Yahoo! Red Herring, April 15:17–18.

11. One of the seminal contributions on knowledge management is Becker, G. S. 1993. Human capital: A theoretical and empirical analysis with special reference to education. 3rd ed. Chicago: University of Chicago Press.

12. For an excellent discussion of social capital and its impact on organizational performance, refer to Nahapiet, J. & Ghoshal, S. 1998. Social capital, intellectual capital, and the organizational advantage. Academy of Management Review, 23:242–66.

13. Polanyi, M. 1967. The tacit dimension. Garden City, NY: Anchor Publishing.

14. Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17:99–120.

15. Some of the notable books on this topic include Edivssion & Malone, op. cit.; and Stewart, op. cit.; and Nonaka, I. & Takeuchi, I. 1995. The knowledge creating company. New York: Oxford University Press.

16. Stewart, T. A. 2000. Taking risk to the marketplace. Fortune, March 6:424.

17. Dutton, G. 1997. Are you technologically competent? Management Review, November:54–58.

18. Dess & Picken, op. cit., p. 34.

19. Webber, A. M. 1998. Danger: Toxic company. Fast Company, November:152–61.

20. Anonymous. 1997. Key to success: People, people, people. Fortune, October 27:232.

21. Martin, J. 1998. So, you want to work for the best . . . Fortune, January 12:77.

22. Carbonara, P. 1997. Hire for attitude, train for skill. Fast Company, August– September:66–67.

23. Stewart, T. A. 1996. Why value statements don’t work. Fortune, June 10:138.

24. Martin, op. cit.

25. Cardin, R. 1997. Make your own Bozo Filter. Fast Company, October–November:56.

26. Carbonara, op. cit.

27. Martin, op. cit.; Henkoff, R. 1993. Companies that train best. Fortune, March 22:53–60.

28. Anonymous. 1996. Hiring smart—and fast. Fast Company, August–September:88.

29. Ibid.

30. Stewart, T. A. 1998. Gray flannel suit? moi? Fortune, March 18:80–82.

31. Ibid.

32. Anonymous. 1997. Keys to success: People, people, people. Fortune, October 27:232.

33. The discussion of the 360-degree feedback system draws on UPS. 1997. 360-degree feedback: Coming from all sides. Vision, March:3 (a UPS Corporation internal
company publication); Slater, R. 1994. Get better or get beaten: Thirty-one leadership secrets from Jack Welch. Burr Ridge, IL: Irwin; Nexon, M. 1997. General Electric: The secrets of the finest company in the world. L’Expansion July 23:18–30; and Smith, D. 1996. Bold new directions for human resources. Merck World (internal company publication), October: 8.

34. This exhibit is adapted from Slater, op. cit., pp. 152–55.

35. Kets de Vries, M. F. R. 1998. Charisma in action: The transformational abilities of Virgin’s Richard Branson and ABB’s Percy Barnevik. Organizational Dynamics, Winter:20.

36. One has only to consider the most celebrated case of industrial espionage in recent years wherein José Ignacio Lopez was indicted in a German court for stealing sensitive product planning documents from his former employer, General Motors, and sharing them with his executive colleagues at Volkswagen. The lawsuit was dismissed by the German courts, but Lopez and his colleagues are still under investigation by the U.S. Justice Department. Also consider the recent litigation involving noncompete employment contracts and confidentiality clauses of International Paper v. Louisiana-Pacific, Campbell Soup v. H. J. Heinz Co., and PepsiCo v. Quaker Oats’s Gatorade. In addition to retaining valuable human resources and often their valuable network of customers, firms must also protect proprietary information and knowledge. For interesting insights, refer to Carley, W. M. 1998. CEO gets hard lesson in how not to keep his lieutenants. The Wall Street Journal, February 11:A1, A10; and Lenzner, R. & Shhok, C. 1998. Whose Rolodex is it, anyway? Forbes, February 23:100–103.

37. Lieber, R. B. 1998. Why employees love these companies. Fortune, January 12:72–74.

38. The examples in this section draw upon a variety of sources, including Lubove, S. 1998. New age capitalist. Forbes, April 6:42–43; Kets de Vries, op. cit. Pfeffer, J. 1995. Producing sustainable competitive advantage through the effective management of people. Academy of Management Executive, February:55–69. The concept of strategic intent is generally credited to Hamel, G. & Prahalad, C. K. 1989. Strategic intent. Harvard Business Review, 67:63–76.

39. Kets de Vries, op. cit., pp. 73–92.

40. Amabile, T. M. 1997. Motivating creativity in organizations: On doing what you love and loving what you do. California Management Review, Fall:39–58.

41. The discussion of internal markets for human capital draws on Hamel, G. 1999. Bringing Silicon Valley inside. Harvard Business Review, 77(5):71–84.

42. Hamel & Prahalad, op. cit., pp. 63–76.

43. Pfeffer, J. 2001. Fighting the war for talent is hazardous to your organization’s health. Organizational Dynamics, 29(4):248–59.

44. For an insightful discussion on strategies for the retention and development of human capital, refer to Coff, R. W. 1997. Human assets and management dilemmas: Coping with hazards on the road to resource-based theory. Academy of Management Review, 22(2):374–402.

45. The examples in this section draw upon the following sources: Stewart, op. cit.; and Fisher, A. 1998. The 100 best companies to work for in America. Fortune, January 12:69–70.

46. The statistics on child care trends are drawn from Bubbar, S. E. & Aspelin, D.J. 1998. The overtime rebellion: Symptom of a bigger problem? Academy of Management Executive, 12:68–76. The other examples in this section are drawn from various sources, including Munk, N. 1998. The new organization man. Fortune, March 16:68–72; and Hammonds, K. H., Furchgott, R., Hamm, S. & Judge, P. C. 1997. Work and family, Business Week, September 15:96–104.

47. This discussion draws on Dess, G. G. & Lumpkin, G. T. 2001. Emerging issues in strategy process research. In Hitt, M. A., Freeman, R. E. & Harrison, J. S., eds. Handbook of Strategic Management. Malden, MA: Blackwell:3–34.

48. Capelli, P. 2000. A market driven approach to retaining talent. Harvard Business Review, 78(1):103–13.

49. This hypothetical example draws on Peteraf, M. 1993. The cornerstones of competitive advantage. Strategic Management Journal, 14:179–91.

50. Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management Journal, 5:171–80.

51. Wysocki, B., Jr. 2000. Yet another hazard of the new economy. The Pied Piper effect. The Wall Street Journal, March 20:A1–A16.

52. Ibid.

53. Buckman, R. C. 2000. Tech defectors from Microsoft resettle together. The Wall Street Journal, October:B1–B6.

54. An insightful discussion of the interorganizational aspects of social capital can be found in Dyer, J. H. & Singh, H. 1998. The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review, 23:66–79.

55. Kuedtjam, H., Haskins, M. E., Rosenblum, J. W., & Weber, J. 1997. The generative cycle: Linking knowledge and relationships. Sloan Management Review, 39(1):47–58.

56. David Pottruck. 1997. A speech deliverd by the co-CEO of Charles Schwab Co. Inc. to the Retail Leadership Meeting, San Francisco, January 30; and Miller, W. 1999. Building the ultimate resource. Management Review, January:42–45.

57. Prusak, L. & Cohen, D. 2001. How to invest in social capital. Harvard Business Review, 79(6):86–93.

58. Leonard, D. & Straus, S. 1997. Putting your company’s whole brain to work. Harvard Business Review, 75(4):110–22.

59. Leana, C. R. & Van Buren, H. J., III. 1999. Organizational social capital and employment practices. Academy of Management Review, 24:538–55.

60. Prusak & Cohen, op. cit., pp. 86–93.

61. Teitelbaum, R. 1997. Tough guys finish first. Fortune, July 21:82–84.

62. Taylor, W. C. 1999. Whatever happened to globalization? Fast Company. December: 228–36.

63. Ibid.

64. Lei, D., Slocum, J. & Pitts, R. A. 1999. Designing organizations for competitive advantage: The power of unlearning and learning. Organizational Dynamics, Winter:24–38.

65. The examples of Andersen Consulting and Access Health draw upon Hansen, M. T., Nohria, N., & Tierney, T. 1999. What’s your strategy for managing knowledge? Harvard Business Review, 77(2):106–18.

66. Capelli, op. cit.

67. Ibid.

68. Koudsi, S. 2000. Actually, it is brain surgery. Fortune, March 20:233.

69. Labarre, P. 1998. People go, knowledge stays. Fast Company, September:48