Dr Wayne Brockbank*, clinical professor of business at the University of Michigan Business School, explains the ‘why, what and how’ of human resource strategy, and where companies can make the greatest gains

The fun thing about being in human resources (HR) today is that we don’t have to look far to find out why it is becoming important. We have some pretty compelling data from our research at the University of Michigan. It says that in the last five or six years the nature of business has changed radically, that it has required more accessing and leveraging on the human side of business than ever before. I’d like to think that HR departments have something to do with this.

I’ll begin with a look at the separation of finance and accounting in the business world, since HR is also splitting itself into two fields. The division of accounting and finance took place around the 1910s in North America. Accounting came to be recognised as the transactional side of the equation: keeping track of day-to-day numbers and knowing in exact detail what happens on an everyday basis. The finance part of the parcel handled the more critical functions: where is the company headed? How will I get capital, and how will that capital be deployed? How can capital utilisation be optimised?

Split in HR
The same sort of split is occurring in HR, between the transformational, strategic side; and the day-to-day delivery of basics, such as the administration of benefits and payroll, entry-level hiring and new-employee orientation. These are obviously important, just as accounting is important, and has to be done well. But that’s not how the future value of HR is going to be expressed.

The high value-added practices of HR will be expressed in issues such as leadership development. Most important will be the identification and creation of organisational capabilities, but strategic HR will also involve inventing sustainable and distinct competitive advantages.

Climate of increased competition
Changes are occurring in the areas of globalisation and deregulation, and communication and transportation costs are going down fast. These developments have resulted in a climate of much greater competition. Companies can compete anywhere in the world, they can access intellectual capital anywhere in the world, they can move products and services to different locations, they can transport their capital more easily than before - all of this creates a world of greater globalisation and competition.

That, in turn, creates a world in which customers, employees and owners can be more demanding, because they have alternative places to work and deploy their capital. When we consider these factors, the implications for managing the human side of the business become transparent.

Core competence
To illustrate the point, let’s consider the emergence of organisational capability as a dominant paradigm. In 1988, my colleague C. K. Prahlad wrote an article in the Harvard Business Review called ‘Core competence’. He indicated that core competence is what a company does best, based upon what it knows best. He used Honda as an example of a company that identified its core competence (internal combustion engines) and built an entire enterprise around that core technological capability.

Between 1988 and 1992-93, every major consulting firm in the world created major practices around the concept of identifying and creating core competencies. The problem was that about this time there occurred a major change in the way technological capability was defined. The life-span of technical knowledge shrank rather dramatically.

It used to take 78 months for a car to go from concept to production; now it takes 24 months. The percentage increase in the speed of information processing over the last 10 years has jumped about 500,000 times. So the speed at which change is occurring, and the speed of technological innovation turnover have become really striking. This implies that the life-span of technological capability is shrinking.

Ability to develop new technologies now critical
Hence, the critical issue is no longer the technical knowledge that you have - it is the ability to develop new technological capabilities. When you make that shift, it marks a fundamental change in the nature of competitive advantage. Competitive advantage used to be defined as the technical knowledge that an enterprise had. It has now shifted to being the ability to be innovative and creative, to be flexible and agile, to be a learning organisation.

When you make the shift from technical knowledge to cultural knowledge, or capability-based knowledge, the key issue is how well you are able to manage the company’s cultural capabilities. That’s not because HR has become more important; it’s because the scope of technological knowledge has been significantly reduced.

The question now is how to cultivate a culture that supports and creates new innovations that will keep you ahead of the competition. You can’t rely on the past; you have to bet on creating the future. The mandate this development delivers for HR professionals is to manage organisational capability much better in the future than they have in the past.

The world’s best-managed companies understand what the organisational context needs to be for their business to survive and prosper. They know the key capabilities that success demands. That’s what we call organisational capabilities.

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* The faculty director of the ‘strategic HR planning program’ and the ‘advanced HR executive program’ at the University of Michigan's Executive Education Centre, Dr Brockbank is also the co-director of the University’s ‘HR executive program’. Wall Street Journal and Business Week have consistently rated these three programmes as the best HR executive programmes in the United States and Europe.

This is an edited version of Dr Brockbank’s address and responses at an interactive session of a human resources forum organised under the aegis of the Tata Business Excellence Model on October 8, 2002.

Uploaded in October 2002