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HUMAN CAPITAL IMPACT ON THE ENTERPRISE COMPETITIVENESS

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HUMAN CAPITAL IMPACT ON THE ENTERPRISE COMPETITIVENESS
Ilona Dubra
University of Latvija,
Tel. +37126407972, e-mail: ilona.dubra@inbox.lv

The present day presents a highly turbulent business environment as well as it’s obvious that firms’
competitive advantages are quite temporary. It seems to be that top managers do not have all the answers to the
rapidly changing and challenging situations that were seen by their firms’. That is the fact why organizations
should built its own core resources with the purpose of achievement of advanced competitiveness of the firm.
The resources which include the employee’s individual and collective learning, knowledge, skills and expertise,
creativity and innovation will lead to the firm’s human capital accumulation and to the customer – valued
outcomes as well. The basis of the firm’s competitive effectiveness lies in its ability to develop, provide and
integrate the collective and individual special knowledge with the aim of generating specific skills, capabilities
and innovation. The paper reveals the definitions of human capital concept as well as stress out the importance
of the human capital effect on the firm competitive performance. The conclusions reflect not only the main ideas
discussed in the paper, but also the goal of the paper. The paper object – the influence of human capital on the
enterprise competitiveness. The paper goal – to analyze the importance of human capital effect on enterprise
competitive performance.
Key words: human capital, firm competitiveness, customer – valued performance.
The linkage of enterprise competitiveness and employees performance
Traditionally, knowledge management literature points out that human capital is a key intangible
form of value creation. Human capital definition is usually related to competences of employees, which
includes the knowledge, skills, experiences and abilities of people.1 K. Wigg defined human capital as “a part
of intellectual capital. The firm’s human capital consists of the knowledge, understanding, skills, experience
and relationships of its employees. Human capital is the property of employees and is only leased or rented
to the enterprise.”2 U. Johanson stated that “human capital is often defined as a part of intellectual capital or
intangible resources of firms. Skandia, for instance, divided intellectual capital into human capital and all
other intangible values, that latter were divided into structural capital, composed of customer capital and
organizational capital.”3 G. Ahonen stressed out that “human capital is the only generative intangible and
therefore, the central element of intellectual capital. Some human capital can be unique to the individual,
whereas other human capital can be generic. Examples include innovation capacity, creativity, know-how
and previous experience, teamwork capacity, employee flexibility, tolerance for ambiguity, motivation,
satisfaction, learning capacity, loyalty and formal training and education.”4
In fact, knowledge is learned, acquired, developed and used by people who work in particular
enterprise. Actually, the basis of the firm’s competitive effectiveness lies in its ability to develop, provide
and integrate the collective and individual special knowledge with the aim of generating specific skills,
capabilities and innovation, so in consequence – customer – valued performance.5
The ability of the enterprises to compete in highly competitive markets depends on their employee’s
accumulation of knowledge and capabilities. There is no doubt that employee should identify new
opportunities, think and act innovatively, explore and discover new path for growth, develop required
capabilities and use them constantly. In other words employee is needed to face today’s challenges and
prepare for an uncertain future. All above mentioned tasks and activities are knowledge – intensive, so that’s
why it’s quite vital to admit that the employees of the enterprises are the creators, owners and users of this
kind of knowledge which is the most valuable resource of the enterprise. The linkage of knowledge
(including learning, development, sharing and creative use) with employees as the most valuable
resource of the enterprise is depicted as follows (figure 1.):

1
PN Bukh, LT Heine & J Mouritsen, „Intellectual capital statements and knowledge management: Measuring, reporting and acting”,.
Australian Accounting Review, vol. 9, no. 3, 1999, p. 15-26, retrived 20 February 2010, http://www.pnbukh.dk/Internationale_artikler-9980.htm.
2
K Wiig, People Focused Knowledge Management: How Effective Decision Making Leads to Corporate Success, Butterworth-
Heinemann, Oxford, 2004, p. 335.
3
U Johanson, “A human resources perspective on intellectual capital”, in Marr, B. (Ed.), Perspectives on Intellectual Capital:
Multidisciplinary Insights into Management, Measurement and Reporting, Chapter 7, Butterworth Heinemann, Oxford, 2005, pp. 96-105.
4
G Ahonen, “Generative and commercially exploitable intangible assets”, in JE Grojer and H Stolowy (Eds), Classification of
Intangibles, Groupe HEC, Jouy-en-Josas, 2000, pp. 206-13.
5
PN Rastogi, Building a Learning Organization, Wheeler, p.i. New Delhi, 1998, pp. 301-310.

53
 demands
Capabilities, Efficient Processes,
Unstable Markets Innovation
and intensity of these are based on
Competition
Cultivation and Use of Knowledge

therefore
Knowledge is the Quintessential
Resource

which is
Learned, Created, Owned, Shared
which engenders

and Used by People Individually

and Collectively for Wealth
Creation by an Organization

therefore

People in an Organization are its

Ultimate Resource (Human
Capital)
therefore
Success of an Organization
depends on Continuous
Enrichment of its Human Capital

which depends on

Learning, Development, Sharing

and Creative Use of Knowledge

Fig. 1. People as the ultimate resource of an organization

As a rule resources would decline or diminish over the time if they were not upgraded and developed
on the regular basis. Business capacity to produce extra customer – valued outcomes in a regular manner
depends on instant learning and increasing application of knowledge to work by its people.6 Moreover, it’s
obvious that employee’s learning and knowledge in this context must also include an understanding of their
company’s competitive business environment, because, in fact, the behaviours, that define learning and the
behaviours that define being productive are one and the same.7
C. K. Prahalad admitted that enterprise competitive advantage more and more depends on “people –
embodied know-how”. As the matter of fact human capital rather than physical or financial capital,
distinguishes the leaders in the market.8 Moreover, D. Ulrich pointed out that employee knowledge, skills
and abilities form one of the most significant recourses which an enterprise can take advantage of. The
strategic management of human capital now has greater importance than ever.9

6
R Charan & N Tichy, Every Business is a Growth Business, New York, Times Business, 1998, p. 120.
7
S Zuboff, In the Age of the Smart Machine, Basic Books, New York, 1988, pp. 93-10.
8
CK Prahalad, „Developing strategic capability: an agenda for management”, Human Resources Management, vol. 22, 1983, pp. 237-254.
9
D Ulric, „Using human resources for competitive adantage”, in R Kilmann, Making Organizations Competitive, Jossey-Bass, San
Francisco, CA, 1991, pp. 129-155.

54
 Following the work of S. A. Snell et al, D. Ulrich and D. Lake the author of the paper will analyze the
strategic potential of firm’s human capital by comparing two dimensions: value and uniqueness.10
The resource – based view of the firm reveals that resources are valuable when they allow improving
effectiveness, capitalizing on opportunities and neutralizing threats. In this context, firm’s human capital can
add value if it contributes to lower costs, provide increased service or product features to customers.
However, D. J. Collis and C.A. Montgomery announced that the importance of human capital depends on the
degree to which it contributes to the creation of a competitive differentiation. That’s why as the uniqueness
nature of human capital increases, firms have incentives to invest resources into its management with the aim
of reducing risks and capitalize on its productive potential.11
The figure 2 shows the classification of the different forms of human capital that may exist in the
company as well it is quite useful to study this framework and analyze how these forms of human capital
should be managed in order to maximize their contribution to the company.12

High
Uniqueness

1. Idiosyncratic human capital 3. Core human capital

2. Ancillary human capital 4. Compulsory human capital

Low High
Strategic value
Fig. 2. Classification of the different forms of enterprise human capital

Idiosyncratic human capital (low value, high uniqueness). S.A. Snell et al proposed to link it to the
others forms o human capital as well as with relational and organizational capital with the purpose to
increase the performance of this form of human capital. In addition to above mentioned D. P. Lepak and S.A.
Sell stated that organizations should develop human resource systems based on collaboration to support
development, for example, of lateral relations, exchange programs, group – based rewards, team building and
rotation.13
Ancillary human capital (low value, low uniqueness). Employee knowledge is neither useful for
creating customer value nor is it specific for the company. Accordingly to Snell et al the best way to
managing ancillary human capital is to disinvest in employees. In this sense unskilled or semi – skilled
employees, that offer no source of competitive advantage, should be replaced with automate technology.14
Core human capital (high value, high uniqueness). Companies should develop and maximize its value
creating potential and differentiating characteristics. According to D.M. Rousseau and A.S. Tsui, firms may
implement commitment – based human resource systems and developmental performance appraisals may be
used to facilitate the development of firm – specific knowledge and competitiveness.15
Compulsory human capital (high value, low uniqueness). This kind of human capital is not specific to
any company and employees are free, within certain limits, to sell their talents wherever they can achieve the
higher return.16 Human capital theory suggests that organizations would not be likely to invest in this kind of
human capital. Organization should organize the selective staffing process to identify potential employees
with the appropriate skills to generate immediate productivity.

10
RJ Perez, PO Pablos, Knowledge managemant and organizational competitiveness: a framework of human capital analysis. Journal
of knowledge management, vol. 7, no. 3, 2003, pp. 82-88.
11
DJ Collis, CA Montgomery, „Competing on resources: strategy in the 1990s”, Harvard Business Review, July-August 1995, pp.
118-128.
12
SA Snell, DP Lepak, MA Youndt, „Managing the architecture of intellectual capital: implications for strategic human resource
management”, in GR Ferris, Research in Personel and Human Resources Management, vol. 4, 1999, pp. 175-193.
13
DP Lepak, SA Snell, „The human resource architecture: toward a theory of human capital allocation and development”, Academy
of Management Review, vol. 24, 1999, pp. 31-48.
14
SA Snell, PR Pedigo, GM Krawiec, „Managing the impact of information technology on human resource management” in GR
Ferris, SD Rosan, DT Barnum, Human Resourse Management, Oxford, Blachwell, 1999, pp. 159-174.
15
SA Snell, DP Lepak, MA Youndt, M.A, „Managing the architecture of intellectual capital: implications for strategic human
resource management”, in GR Ferris, Research in Personel and Human Resources Management, vol. 4, 1999, pp. 175-193.
16
DM Rousseu, Psychological Contracts in Organizations: Understnding Written and Unwritten Agreements, Sage, Thousand Oaks,
CA, 1995, pp. 76-100.

55
Missing the focus of human capital
The concept of human capital goes beyond the conventional concept of human resources, but it is clear
that the focus of the human capital is sharper, broader and deeper. Human capital focus lies on ensuring and
sustaining the competitiveness of the enterprise, while the focus o the human resources is limited to the
development of the employee’s working skills. The concept of the human capital, on the other hand, extends
the further cultivation of employee’s capabilities, they change their course (in case it was wrong) to the right
direction, learn from the past and present errors so to avoid them, understand fully the nature, purpose, and
circumstances of the enterprise performance and finally employee’s are skilful in monitoring and interpreting
the signals indicating enterprise course and direction.17
That’s why it’s quite vital to observe some dramatic cases where even high level of human resource
management and development practices lead to the serious strategic and cognitive failures occurred by
missing the focus of human capital:
- Ford, General Motors and Chrysler failed to see the increasing threat of the Japanese competitors
who, as a result, had captured a large market share;
- Powerful retail enterprise of Sears failed to see the increasing threat of Wal-Mart and failed to see
new business design and new logic of competition;
- IBM was very late in entering in the PC market, as a result, IBM failed to generate new wealth
from the PC Software market;
- Encyclopaedia Britannica underestimate the implications of printing its products on the CD-ROM;
- Xerox missed out the PC revolution even taking into account Xerox investment in their pioneering
Altos machine, as a result, Apple capitalized on the Xerox’s R&D;
- According to the IBM’s management, the demand for photocopiers was in-sufficient to justify
investment. Later, IBM entered the photocopier market, but had to withdraw after sustained losses in the face
of Xerox’s strong position;
- Compaq missed the opportunity of Just-in-Time assembly of PCs, as a result, it was done by Dell
with outstanding success.18
All above mentioned examples reflect the importance of human capital effect on the enterprise
competitive performance. It’s clear that human capital is needed to be constantly developed with the purpose
to maximize the quality of the company’s products and services by creating customer-valued outcomes.

Conclusion
Human capital is one of the most important resources of the company in the struggle for sustaining the
competitive organizational performance. The ability of the enterprises to compete in highly competitive
markets depends on their employee’s accumulation of knowledge and capabilities. People are the ultimate
resource of an organization that’s why there is no doubt that the ability of the enterprises to compete in
highly competitive markets, by creating value-added products and services, depends on their employee’s
accumulation of knowledge and capabilities, in other words depends on human capital effectiveness.

References
1. G. Ahonen, “Generative and commercially exploitable intangible assets”, in J.E. Grojer and .H Stolowy (Eds),
Classification of Intangibles, Groupe HEC, Jouy-en-Josas, 2000, pp. 206-13.
2. P.N. Bukh, L.T. Heine & J. Mouritsen, „Intellectual capital statements and knowledge management: Measuring,
reporting and acting”,.Australian Accounting Review, vol. 9, no.3, 1999, pp.15-26, retrived 20 February 2010,
http://www.pnbukh.dk/Internationale_artikler-9980.htm.
3. R Charan & N Tichy, Every Business is a Growth Business, New York, Times Business, 1998, p.120.
4. DJ Collis, CA Montgomery, „Competing on resources: strategy in the 1990s”, Harvard Business Review, July-
August 1995, pp. 118-128.
5. U Johanson, “A human resources perspective on intellectual capital”, in Marr, B. (Ed.), Perspectives on Intellectual
Capital: Multidisciplinary Insights into Management, Measurement and Reporting, Chapter 7, Butterworth
Heinemann, Oxford, 2005, pp. 96-105.
6. DP Lepak, SA Snell, „The human resource architecture: toward a theory of human capital allocation and
development”, Academy of Management Review, vol. 24, 1999, pp. 31-48.
7. RJ Perez, PO Pablos, Knowledge managemant and organizational competitiveness: a framework of human capital
analysis. Journal of knowledge management, vol. 7, no. 3, 2003, pp. 82-88.

17
D Ulrich, “A new mandate for human resources”, Harvard Business Review, January–February 1998, p.32.
18
PN Rastogi, Building a Learning Organization, Wheeler, New Delhi, 1998, pp.230-290.

56
 8. CK Prahalad, „Developing strategic capability: an agenda for management”, Human Resources Management, vol.
22, 1983, pp. 237-254.
9. PN Rastogi, Building a Learning Organization, Wheeler, p.i. New Delhi, 1998, pp. 301-310.
10. DM Rousseu, Psychological Contracts in Organizations: Understnding Written and Unwritten Agreements, Sage,
Thousand Oaks, CA, 1995, pp. 76-100.
11. SA Snell, DP Lepak, MA Youndt, „Managing the architecture of intellectual capital: implications for strategic
human resource management”, in GR Ferris, Research in Personel and Human Resources Management, vol. 4,
1999, pp. 175-193.
12. SA Snell, PR Pedigo, GM Krawiec, „Managing the impact of information technology on human resource
management” in GR Ferris, SD Rosan & DT Barnum, Human Resourse Management, Oxford, Blachwell, 1999, pp.
159-174.
13. D Ulric, „Using human resources for competitive adantage”, in R Kilmann, Making Organizations Competitive,
Jossey-Bass, San Francisco, CA, 1991, pp. 129-155.
14. D Ulrich, “A new mandate for human resources”, Harvard Business Review, January–February 1998, p. 32.
15. K Wiig, People Focused Knowledge Management: How Effective Decision Making Leads to Corporate Success,
Butterworth-Heinemann, Oxford, 2004, p. 335.
16. S Zuboff, In the Age of the Smart Machine, Basic Books, New York, 1988, pp. 93-10.

57

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