Russell Coff is a professor of organization and management at Emory University’s Goizeuta Business School, and currently serves on the editorial board of the Academy of Management Review. In the article that follows, Coff discusses his working paper titled “Building Competitive Advantage Without Falling Into The Human-Asset Trap.” Produced in conjunction with Richard Makadok, professor of organization and management at Goizueta, and Maureen Blyler, a doctoral candidate in sociology at Emory and a research assistant in management at Goizueta, the preliminary research discusses the complexities involved in managing a company’s most valuable asset: human capital.

In the smoke stack era of Henry Ford, large industrial factories mattered more so to a company’s success than the actual employee that filled the spot on the assembly line. Human capital counted for little, as most workers could be easily interchanged with another, with minimal training involved. Today, however, our economy is driven by knowledge, as companies such as Microsoft develop information-based products for the marketplace.

However, managing employees becomes problematic when your company’s biggest assets are the employees themselves. Our research illustrates how managers can effectively capitalize on employee strengths to gain a competitive advantage in business, while dealing with the management problems inevitable with a more intelligent workforce.

When knowledge remains the source of competitive advantage, rivals must have difficulty in duplicating it. If workers hold company-specific skills, whether through their acquired experience or formal training on the job, then their skill or value becomes inextricably linked to the business that employs them. Management researchers call this “human-asset specificity,” and it remains one of the three most important factors in building a competitive advantage by way of human assets. Basically, the employee’s skills remain tied to the idiosyncrasies of the specific organization. In this way, many companies protect themselves from competitors that might look to steal away highly skilled employees.

Employee turnover, however, can happen, when managers miscalculate the level of a staff member’s “human-asset specificity.” As in the case of talk-show host David Letterman, NBC falsely assumed that his original “Late Night” show on their network would remain the fare of a younger audience. When CBS afforded Letterman the opportunity to jump ship and move over to an earlier time slot, NBC execs assumed he would never do it. The “Late Night” show theme, trademarks and well-known skits and segments would not translate to the much older audience on CBS, NBC management reasoned.

But, Letterman’s new CBS show succeeded. NBC lost their talk-show host to the rival network by overestimating the entertainer’s human-asset specificity to the network. Employee turnover ranks as one of the top challenges to companies looking to capitalize on human-asset specificity.

Management researchers also refer to “social complexity,” in order to describe the internal and external network of contacts necessary to a company’s ability to function. This is the second factor in building a competitive edge through human assets. For example, an investment-banking firm may require a team of individuals to handle an acquisition, with accountants, lawyers, underwriters and other employees working in tandem on the deal. This socially complex system of employees, and possibly affiliated consultants and vendors, remains difficult for a competitor to duplicate. 

But, along with the advantages of maintaining this competitive advantage through a socially complex organization, a company can also lose sight of the reason for their failures and successes. As companies develop into diverse teams of interrelated employees, managers may find it impossible to pinpoint the internal and external factors that lead to a boom in the bottom line. Management researchers describe this as “causal ambiguity,” when the cause of a company’s performance becomes unclear.

This “causal ambiguity” can stymie outsiders in their efforts to replicate a company’s success, making it the third factor in gaining a competitive edge. For example, Japanese companies Suntory and Sapporo undertook a significant effort to reproduce the taste of fine French wines. Despite considerable efforts to duplicate the process, the Japanese product failed to meet the standards of the French original. The subjective nature of making wine meant that it was difficult to recreate the end result. The human asset, in this case, created the ambiguity in the production process, and in turn stopped the competitor’s attempts to copy it.

More often than not, however, causal ambiguity can create problems for the business itself. The highly successful mass merchandiser Wal-Mart may have fallen victim to it. Despite the blockbuster success of the retail chain, the company’s foray into the much different warehouse store model, Sam’s Club, proved to be a loss leader. Wal-Mart, unsure of its own formula for success, deviated from their original store plan that had made the retailer profitable.

Causal ambiguity also complicates the job of a manager. Without the ability to pick out the reason for a success or failure, managers cannot appropriately reward or alter employee actions. This becomes particularly problematic in organizations based on commission or bonus pay, such as in investment banking. Without a fair way to determine monetary incentives, it may be difficult to motivate or retain key staff members.

The two main problems associated with building a competitive advantage through human assets, employee turnover and the information gap on employee/company performance, can be managed by a number of  “coping mechanisms.” The most obvious coping strategy, a financial reward or bonus, as mentioned above, provides a direct way to retain employees. Non-financial rewards, such as flextime, training opportunities, and fair treatment of staff also keep employees from flocking to the competitor. The Outback Steakhouse, for instance, recognizes the demanding nature of the bustling restaurant environment, and tries to create a lighter workload for its staff than the industry standard.

But, managing turnover through financial and non-financial rewards requires that managers bridge the information gap on employee performance. Socially complex organizations, without an adequate understanding of their own business performance, often lack the information to link incentive to performance. Companies must work to address this information gap by effectively gathering data on employee and company performance from customers, suppliers, co-workers, and independently contracted evaluators.

Our paper cites the Outback Steakhouse as an example of a company that effectively uses information gathering to build on human-asset management. The company came to the forefront in the 1990’s, by using aptitude tests and other screening measures to place staff in positions specifically suited to their abilities. For example, prior to hiring an expediter at the Outback, the prospective employee must pass an aptitude test that relies heavily on memory. An expediter coordinates the flow of work in the kitchen, by giving the cooking staff the orders for food.

By placing workers in the positions suited to their aspirations and skill level, the chain cuts down on the high staff turnover endemic in the industry. While the majority of restaurants suffer a turnover rate of 250% a year for staff and 100% a year for management, the Outback Steakhouse has turnover rates of less than 20% a year for staff and about 4% a year for management.

Another key coping strategy involves building a participatory environment at the organization, wherein employee input is recognized. Generally, job satisfaction increases and employee turnover decreases, when employees believe their opinions about the business are valued. A more participatory company structure also encourages a free flow of performance information to management.

Clearly, firms can realize advantages from their “human assets,” and in turn, differentiate themselves from the pack. The mission for companies then becomes striking a successful balance between capitalizing on those human assets, while successfully resolving the problems inherent in the process.