Human Capital development and Theories in Human Resource Management

Blogpost No. 4: By Tilak Karunaratne (E201471) 

Introduction

A company has resources such as physical resources (like land, raw materials, and equipment), human resources (such as the labor force) and the knowledge base.  To create value, company has to combine these resources in an efficient way, in which the key role is played by the company’s employees / staff.

Knowledge is the key factor of productivity and competitive advantage for organization’s in today’s economy.  Knowledge is provided by the human resource – the employees. 

“The most valuable asset of a 21st-century institution, whether business or non-business, will be its knowledge workers and their productivity. (Drucker, 1959)” 

A skilled employee with commitment to duty can produce more and better products resulting the competitive advantage over company’s competitors, so such an employee is a highly valued asset to a company.  Skill development among employees is therefore a crucial aspect in any company.

 

Picture Source: Internet

Placed under the broad theme Human Resource Management (HRM), employees’ skills development will lead to a significant positive impact on an organization's performance, productivity, and overall success.

Some Theories in Human Resource Management

Several HRM theories highlight the importance of employee skill development, how that skill development could happen and how it benefits the organization.

• Human Capital Theory: Introduced first by Shultz (1961), this theory views employees as valuable assets, and their skills, knowledge, and abilities are considered human capital. Investing in education and skill development enhances this human capital, leading to improved employee performance and productivity. Organizations benefit as skilled employees contribute more effectively to achieving the company's goals.  One major criticism on Human Capital Theory however is that the company may loose its edge if the skilled employees leave.

• Resource-Based View (RBV): Originally proposed by Birger Wernerfelt (1984) and later refined by Jay B. Barney (1991) and other scholars, the resource-based view theory is that competitive advantage is a function of the resources and capabilities of the firm (Wernerfelt, 1984; Conner, 1991; Peteraf, 1993). Barney (1991) has listed four attributes of resources that can give rise to a firm's competitive advantage: value, rarity, imperfect imitability, and lack of substitutability. Such resources help a company to exploit opportunities and/or avoid threats in the environment (Barney, 1991) and improve its efficiency and effectiveness (Capron and Hulland, 1999).  When employees are continuously trained and developed, the company gains an edge by having a workforce more adaptable, innovative, and capable of addressing challenges.

• Social Exchange Theory:  This theory was first proposed in 1958, by the American sociologist George Homans through his article titled “Social Behavior as Exchange.” This is a concept based on the notion that a relationship between two people is created through a process of cost-benefit analysis. In other words, it’s a metric designed to determine the effort poured in by an individual in a person-to-person relationship. The measurement of the pluses and minuses of a relationship may produce data that can determine if someone is putting too much effort into a relationship (Tulane University, 2018). The theory’s core assumptions establish a fundamental foundation within social exchange theory — one size does not fit all.

• Goal setting Theory: According to Wikipedia, Goal setting involves the development of an action plan designed to motivate and guide a person or group toward a goal. Goals are more deliberate than desires and momentary intentions. Therefore, setting goals means a person has committed thought, emotion, and behavior towards attaining the goal.  Employees with skills necessary to achieve their goals are more likely to be motivated and committed. By providing skill development opportunities, companies enable employees to set and attain meaningful goals, aligning individual and organizational objectives. This alignment contributes to improved overall performance. Dr Edwin Locke’s pioneering research in the late 1960s has lead to the emergence of Goal Setting theory.

• Contingency Theory:  This was introduced by Fred Fiedler in his landmark 1964 article, "A Contingency Model of Leadership Effectiveness." The theory recognizes that there's no one-size-fits-all approach to HRM. This theory of leadership states that effective leadership is contingent upon the situation at hand. Essentially, it depends on whether an individual's leadership style befits the situation. According to this theory, someone can be an effective leader in one circumstance and an ineffective leader in another (Miles, Madeline; 2022). Contingent leaders are flexible in choosing and adapting to succinct strategies to suit change in situation at a particular time in the running of the organization (Wikipedia). Skill development initiatives can be tailored to align with the organization's specific needs.  By developing skills that directly address these unique contingencies, organizations can become more agile and better prepared to respond to changes. 

Picture Source: Internet

• Learning Organization Theory: A learning organization promotes continuous learning and development at all levels. Organizations that foster a culture of learning through skill development initiatives create an environment where employees feel empowered to innovate, share knowledge, and adapt to new challenges. This adaptability is crucial for the organization's long-term success. 

 It was through the writings of pioneers, such as Cangelosi and Dill (1965), and March and Simon (1993) that the notion of organizational learning emerged. This has gained further prominence through the work of Argyris and Schon (1978), and Revans (1980). However, it was in 1990s that Peter Senge (1990) popularized the notion of the learning organization and these ideas became more widespread in their application. The “learning organization” embraces the importance of collective learning as it draws on a larger dimension of internal and external environments. On the other hand, “organizational learning” is a process which answers the question “how is learning developed in an organization? (Yeo, 2003).

When reflecting as managers, it can be noticed that all these Human Resource Management (HRM) theories have been applied at our work many a time and we continue doing so. For instance, it is predominantly the Contingency theory that was applied at crises in the workplace.  Principles of Human Capital theory were applied when training programmes were designed and conducted. 

 

Conclusion

Skill development in employees benefits – in addition to the employee - the organization by enhancing human capital, creating a competitive advantage, fostering positive relationships, aligning goals, adapting to contingencies, and cultivating a culture of learning. HRM theories explain how that happens and highlight the strategic importance of skill development in achieving organizational objectives and staying competitive in a dynamic business environment.

 

References

Miles, Madeline (2022); BetterUp; It depends. Understanding the contingency theory of leadership.  https://www.betterup.com/blog/contingency-theory-of-leadership

MindTools; Locke’s Goal Setting Theory; https://www.mindtools.com/azazlu3/lockes-goal-setting-theory

Nafukho F.M, Hairston N.R and Brooks K (2004) Human Capital Theory: Implications for Human Resource Development; HRDI 7:4 (2004) pp 546

Tulane University, School of Social Work; What is Social Exchange theory? (2018); https://socialwork.tulane.edu/blog/social-exchange-theory/