Organizations today face numerous challenges: worldwide competitors, changes in information technology, increased reliance on knowledgeable workers, and a shifting economic environment. In the face of this altered business climate, competitive advantage – a compelling reason to do business with an organization—is more vital than ever. In response to new pressures, companies have been forced to modify internal structures, adopt new processes, and embrace fundamental changes to the nature of their business. These changes have created significant implications for an organization’s employees.
Faced with the difficulty of securing advantage by traditional means, management has increasingly focused on employees as a key asset and driver of productivity. Companies have acknowledged the differences that employees can make. Organizations have increasingly adopted the human capital theory, which holds that employees are an asset of an organization. Human capital represents the competency and knowledge of an organization’s employees. Although it is an intangible concept, human capital is just as real and important as physical assets. Today, market analysts determine a company’s value by looking not only to a firm’s balance sheet, but also to its human capital.
Traditionally, companies have attempted to maintain competitive advantage by reducing costs and introducing new products. Continual cost cutting is not a long term solution, though. Competing on cost alone is difficult. As industries become increasingly commoditized, lower costs are available to most competitors and are easily matched. Similarly, even a constant supply of innovative products cannot guarantee competitive advantage. In fast-moving, high-technology industries, for example, companies relentlessly produce new products and still struggle to keep up with competitors.
In response to such competition, organizations will seek to maximize their human capital as a differentiator. Presumably, an organization that invests in its human capital will be rewarded with increased productivity and higher returns. But here is where the problem develops. Although it makes theoretical sense to label human capital as an asset, employees differ from other forms of assets. Seemingly, an organization lacks an ownership interest in its employees and the human capital that they represent. Only the employment relationship secures the retention of human capital.
Investment by an organization in human capital – its employees – leads to a paradox. To date, proponents of the human capital theory have been eager to create a new strategic role and have failed to address the following paradox. A company that invests in its employees, providing those employees with new skills and knowledge, will find that it has increased the employee’s value. This added value, however, does not necessarily correspond to increased value for the employer. Instead, gained skills, knowledge, and experience will enhance the employee’s marketability, permitting her to transfer the benefits of the organization’s investment to a competitor. A company that invests in human capital without taking steps to secure that capital will find its investment flowing to the competition.