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Today, more than ever, organizations are doing everything they can to remain competitive and economically viable. A strong company must question each expense and reduce unnecessary overhead. To accomplish this, companies often eliminate corporate education, training, and development efforts. Yet overwhelming data indicates that the greatest companies consistently invest in the development of one asset that continuously appreciates: human capital.
The following case studies are based on excerpts from the book, “The Human Equation” by Jeffrey Pfeffer and represent the power of implementing strategies that increase a company’s human capital.
Does the way a firm manages its people affect profitability and stock price? Yes, according to a study by Mark Huselid. Through research based on 968 responses to a survey of the senior human resources professional in a sample of 3,452 firms representing all major industries, Huselid constructed two scales. The first was called employee skills and organizational structures which include, “practices intended to enhance employees’ knowledge, skills and abilities, and provide mechanisms through which employees can use the skills in performing their roles. The second scale, measuring employee motivation, is comprised of practices “designed to recognize and reinforce desired employee behavior.”
The study assessed the effects of management practices on turnover, sales per employee (a measure of productivity), and the firm’s ratio of stock market value to book value. The study clearly showed that an increase in the factors being measured was brought about by management practices, emphasizing the increase in human capital.
The observations yielded the following results: “The magnitude of the returns for an investment in High Performance Work Practices is substantial. A one standard deviation increase in such practices is associated with a…7.05 percent decrease in turnover and, on a per employee basis, $27,044 more in sales and $18,641 and $3,814 more in market value and profits, respectively.”
In a subsequent study conducted in 1996 of 702 firms found even larger economic benefits: “A one standard deviation improvement was associated with an increase in shareholder value by $41,000 per employee.” Since the average stock market value per worker for all of the firms in the sample was about $300,000, firms in the upper 16% of the distribution in terms of their human capital policies experience about a 14 percent market value premium – clearly economically substantial.
The 1980s were a turbulent time for the US automobile industry. The decade began with Ford, General Motors, and Chrysler posting tremendous losses and shutting plants down while the Japanese companies were opening new plants. This presented an opportunity for the creation of a joint venture between Toyota and GM in Fremont, California. GM had previously closed its Fremont plant in 1982. At that time, the plant had poor productivity, poor quality, and a history of extensive labor troubles; including strikes, high levels of absenteeism and turnover, and problems with alcohol and drug abuse. The joint venture resulted in the reopening of the Fremont plant and the formation of a New United Motor Manufacturing, Inc. (NUMMI).
When NUMMI began production in the Fremont plant in 1985, 85 percent of the people had previously been employed in the old plant. The plant was still organized by the United Auto workers and used the same equipment that had been there in the past. The difference was the implementation of an operating philosophy that emphasized increasing human capital. The operating philosophy included seven points:
1. The never-ending search for perfection (continuous improvement)
2. Reduction of costs through a “just-in-time” system
3. Development of full human potential
4. Building mutual trust
5. Developing team performance
6. Treating every employee as a manager
7. Providing a stable livelihood for all employees
Based on this heavy investment in human capital, the NUMMI plant decreased the time it would take an ordinary GM plant to build a car by 48.5%. This is consistent with another study performed in 1989 at sixty-two automobile plants facing the same dichotomy in operating philosophies: 47.4% decrease in the amount of defects and a 42.9% increase in productivity. While the change to a just-in-time method of inventory may have accounted for a small percentage of the savings, it is the commitment to the increase in human capital that made the biggest difference.
It is clearly evident that a service firm relies very heavily on its people to maintain a successful business. It is not surprising then that there is an obvious link between a strategy that emphasizes the development of human capital and results. This relationship is explained below:
The simultaneous delivery and receipt of service in the face-to-face, for-profit services sector brings employees and customers physically, organizationally, and psychologically close…Customers often equate services with the employees who render them…Employees and customer perceptions, attitudes, and intentions share a common basis and are related to each other.
There are a number of studies involving several different organizations operating in the service industries which provides evidence for a positive relationship between employee attitudes, customer attitudes, and profits. One such study of bank branches found that when employees reported the branch had a high service imperative, as assessed by factors such as whether or not the branch had a sufficient number of quality people to perform its tasks, customers reported receiving higher levels of service.
A study of thirty of the existing fifty-four minimills in the United States contrasted two different management approaches, one characterized as a “control” approach and the other as a “commitment” approach, as summarized below
The goal of control human resources systems is to reduce labor costs, or improve efficiency by enforcing employee compliance with specified rules and procedures and basing employee rewards on some measurable output criteria…In contrast, commitment human resource systems shape desired employee behaviors…by forging psychological links between organizations and employee goals…the focus is on developing committed employees who can be trusted to carry out job tasks.
The commitment system emphasized a more highly skilled work force, engaged in more training, and had more delegation of authority. The research measured two dimensions of minimill performance: labor efficiency, or the hours of labor required to make a ton of steel, and the scrap rate. After applying statistical controls, the results showed that using a commitment strategy was significantly related to performance. Minimills that used a commitment-oriented approach (developing human capital) required 34 percent fewer labor hours to produce a ton of steel and showed a 63 percent better scrap rate.
Leadership Capital Group can help you put together a People Strategy that will get the most out of your three human capital resources: Individual Capital, Cultural Capital, and Leadership Capital. We are committed to helping you advance business through people.
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