Competitive Advantage Through HR Innovation

Despite great recognition for human resources (HR) as a source of value addition within firms, HR innovation remains poorly understood. Below, Upamali Amarakoon, Jay Weerawardena and Martie-Louise Verreynne explore how firms can gain competitive advantage through HR innovation.

Innovation has long been recognised as a source of competitive advantage¹. Although human resource (HR) is considered the most valuable asset in today’s firms, how HR innovation enables firms to deliver superior performance remains an area of ambiguity. There is general consensus that competitive advantage built on human resource innovation is not easily imitable, and therefore vital to the sustainability of firm growth and competitiveness². Yet, the primary focus of both practitioner and academic studies has been on technical (product and process) innovation with little attention paid to non-technical innovation such as HR innovation.

Non-technical innovation differs from technical innovation which means that the approaches adopted to capture the latter may not be adequate and appropriate to understand the complexities involved in HR innovation. HR innovation therefore warrants closer investigation. Our work in HR innovation suggests that some questions of practical interest worth answering are: What form does HR innovation take? What is the role of HR professionals in undertaking HR innovation? How do HR professionals create and utilise knowledge resources required for HR innovation? What is the role of line and top management in successful HR innovation? And, how does HR innovation enable firms to compete better? This article addresses these questions while exploring how firms can gain competitive advantage through HR innovation.

What is HR innovation?

Innovation can be viewed as either a process or an outcome. In this article we view innovation as an outcome. Therefore, we consider HR innovation as an HR management activity/ practice/ programme/ system adopted by a firm that is new and value creating to the adopting firm. The degree of HR innovation differs based on the degree of newness, extent of change, number of employees affected, and nature of its outcomes. To illustrate, the 20% Project introduced by Google, which allowed their engineers to work on pet projects 20 per cent of their paid working time (that is one day a week), was a radical innovation in Google’s work design. The 20% Project was an innovation that added value by improving motivation and performance, retaining current employees and attracting new talent.

HR innovation can happen in any firm at varying degrees. It can be as simple as a firm changing from paper-based recruitment advertising to on-line advertisements, or it can be radical, as when then Continental (now United) airlines introduced their on-time performance-based bonus scheme in the mid 1990s, and 3M introduced a ‘work on your own project’ programme in early 1970s.

The role of HR professionals

The essential first step for HR innovation is to identify a requirement or an opportunity for innovation by HR professionals. Thereafter HR professionals must assess associated risks and resource requirements. Every HR change comes with risks such as the risk of investment, implementation failure, and failure to deliver desired outcomes. Therefore, the decision to undertake innovation has to be made with a good understanding of associated risks and resources. Although the size of the firm may affect resource availability to undertake HR innovation, evidence from the in-depth interviews we had in Australian manufacturing and service firms suggests that firms irrespective of their size undertake HR innovation. However, all HR innovations required HR professionals to acquire, share, and integrate, new knowledge.

How to create, share, and utilise required knowledge
HR professionals pursuing HR innovation acquire new knowledge from both external and internal sources. External knowledge may include, but is not limited to, learning from competitors, industry networks, customers, and previous work experience. Internal knowledge often includes trial and error learning and learning from line managers and operational employees. HR professionals must maintain an appropriate balance between external and internal learning efforts as any emphasis on one form of learning will lead to an imbalance. For example, if HR professionals of a firm heavily invest in external knowledge generation, ignoring internal knowledge, there is a higher probability that they will focus more on the latest HR trends rather than identify what is actually required by the firm. HR is a support function of the firm. Therefore, it is essential for HR professionals to develop a thorough understanding of the firm’s HR requirements. Consider the Google example mentioned earlier. Google is not the first to introduce programmes similar to its 20% Project; 3M and HP had similar programmes and obtained many positive outcomes. When Google faced the challenge of maintaining an innovative firm culture and providing challenging jobs to its highly talented workforce, people operations of Google learnt from its external environment. Google’s programme, even though conceptually similar, is significantly different from others in terms of flexibility and resource allocation and is designed to match Google’s requirements. Therefore, it demonstrates a high degree of internal learning too.

The work that we undertook in the Australian service and manufacturing context also suggests that firms that undertake a higher degree of HR innovation have HR professionals who actively acquire internal and external knowledge. To illustrate, in our in-depth interviews the HR manager of a mining service provider and the general manager HR of an Australian financial service institution respectively related to their internal and external knowledge acquisition:

‘We need to understand how other departments work, how they relate and interact with each other, what their problems and issues are, for us to deliver our services effectively’ or  ‘We do a lot of research externally to say, okay well that’s what is happening’.

All firms in our study also had a wide array of formal (e.g. weekly/monthly meetings, memos, suggestion schemes) and informal (e.g. chats over coffee/lunch or brownbag lunches) channels to share acquired knowledge among others within the HR function. However, knowledge acquisition and sharing alone is not enough, it has to be utilised or integrated into HR innovation. This cannot be done by HR professionals alone. It requires support.

Whose support is required?

Design and implementation of HR innovation in a firm should be an inclusive process that requires input from line management and recognition from top management. As mentioned earlier, new HR activities or practices should meet the requirements of the firm, or in other words, the requirements of the line management. Internal learning assists better understanding of line management requirements. However, evidence from our work suggests that those firms who undertake a higher degree of HR innovation go beyond knowledge acquisition and involve line managers in design and development stages of HR innovation. For instance, in an in-depth interview with us, the general manager HR of an Australian financial service institution stated:

‘We will engage with focus groups, subject matter experts, in different sessions testing it [designed HR practices/activities],getting their feedback, tweaking it before it actually goes live’.

This suggests that a higher degree of involvement of line management at the design and development stages of HR innovation not only helps to align new HR practices/activities/programmes with stakeholder requirements, but also eases the implementation process, thereby reducing implementation failures (the Hawthorne effect).

The role of top management
Effective design and implementation of HR innovation importantly requires top management support. There are two types of support: first, recognition for HR in general, which includes HR representation in top management, autonomy for HR professionals in strategically important HR related decision making, and confidence of the top management in the capabilities of HR professionals, and second, recognition of the proposed HR innovation which involves resource allocation for proposed HR changes and explicit endorsement by the top management. In situations where there is limited top management support, HR innovation suffers. To illustrate, a senior HR partner of an Australian subsidiary of a global construction service provider showed how its highly centralised decision making structure has limited the capacity of local HR to use local knowledge to implement HR changes. The changes imposed on them by their head office left no room for discretionary initiative at the local levels. As the senior HR partner stated:

‘The decisions around processes and systems are made in the US and they get rolled out in a similar fashion to the whole world. We have the opportunity to provide feedback, but it doesn’t change anything’.

Getting support of top and line management alike is often dependent on the credibility of the HR function. Such credibility is earned when HR professionals are knowledgeable of firm requirements and what is happening in the external environment, which further underpins the importance of internal and external learning. Most importantly, credibility comes from their ability to deliver on promises.

Outcomes of HR innovation

Returning to Google’s 20% Project; this has supported the development of around 50 per cent of Google’s current service offerings including Gmail, Google News, and Google Adsense. As mentioned earlier, it has also resulted in improved employee motivation, productivity, and retention. However, it is also true that all firms do not have the capacity of Google to introduce such radical HR innovations. So, can any HR innovation bring value to the adopting firm?

The evidence from our Australian case work suggests that both radical and incremental HR innovation can add value. A mining service provider included in our Australian study undertook incremental HR innovation by setting its compensation and benefits above the industry average. As the HR manager of this firm stated, this change has improved the firm’s ability to attract and retain employees in a competitive market. If this advantage was gained by merely changing compensation and benefits, it could easily be imitated. However, our findings suggest that the outcomes are not only from the HR innovation itself, but also the process involved in its design and development. In this particular example, HR professionals worked closely with employees to develop the new compensation plan. That process in itself has boosted employee morale and the feeling of belongingness within the firm, contributing to the firm’s ability to retain its employees. Therefore, the resulting advantage is not easily imitable by competitors.

The inability of competitors to grasp the key pillars on which competitive advantages have been built results in sustained competitive gains. To provide an analogy, the world class music created by the leading Vienna Philharmonic Orchestra can be attributed to many factors; including the individual skills of its members, their rigorous training, their remuneration, the way it is managed and the members’ sense of belongingness to its world class status. This excellence cannot be attributed to individual players of the orchestra and on that logic a rival orchestra cannot build competitive advantage by simply pinching some of its members.

In retrospect

Firms can utilise HR innovation to gain competitive advantage. Providing practical examples and evidence from our work in the Australian manufacturing and service setting, we suggest that all firms can undertake HR innovation, albeit in varying degrees. HR professionals drive this type of innovation, which requires them to acquire and integrate internal and external knowledge and obtain support from both the line and top management. We therefore argue that HR professionals who undertake HR innovations as sources of value addition and/or competitive advantage should not only engage in continuous learning from their internal and external environment, but also gain the respect and confidence of internal stakeholders. At a time when firms increasingly look for non-traditional sources of competitive advantage, we encourage viewing HR innovation as a feasible path for the HR function to add value and contribute to competitive advantage.

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About the Authors
Upamali Amarakoon is a PhD Candidate at The University of Queensland Business School, Australia, and studies how HR innovation contributes to competitive advantage. Her research interests include entrepreneurial HR management, non-technical innovation and firm-level value addition, and the role of learning capabilities in non-technical innovation.

Dr. Jay Weerawardena is Associate Professor of Strategic Marketing, The University of Queensland Business School, Australia. He primarily researches on dynamic capabilities and organisational innovation-based competitive strategy. His recent research projects have been on HR innovation-based competitive strategy, high-tech and entrepreneurial marketing, new service development, and social entrepreneurship, innovation and social value creation.

Dr. Martie-Louise Verreynne is Senior Lecturer in Strategy, The University of Queensland Business School, Australia. She is interested in the capabilities that underpin growth, strategy processes, innovation, and entrepreneurship. Her current research projects focus on small firm growth, innovation capabilities, networking for innovation and environmental uncertainty.

References
1. See F. Damanpour and D. Aravind, ‘Managerial innovation: Conceptions, processes, and antecedents’, Management and Organization Review, vol 8, no 2, 2011.
2. See J. Barney, ‘Firm resources and sutained competitive advantage’, Journal of Management, vol 17, 1991.