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Is Human Capital Theory Compatible with the Strategy Literature?

[Another Becker-themed guest post, this one from former guest blogger Russ Coff, a leader in the emerging field of Strategic Human Capital.]

| Russ Coff |

Human capital theory (HCT) has brought a lot to the strategy literature. It has also held it back as scholars import logic that is inconsistent with core assumptions of the literature.

Before I launch into my heretical rant, let me acknowledge, as others have said so eloquently, Gary Becker was a truly innovative thinker. The most unique part was that, while he was firmly grounded in economic logic, he did not hesitate to venture into new terrain. Though he is most known for his work in HCT, his thoughtful explorations of marriage, discrimination, crime, and many other topics demonstrate the breadth and depth of his intellect.

However, strategy represents new terrain that is often inconsistent with the logic of HCT. In this sense, I think Becker would have relished the opportunity to examine this context as a new problem. Human capital challenges the strategy literature in the most fundamental ways possible – if we go beyond a cursory integration with Becker’s world. Here are some examples:

How much does firm-specific human capital (FSHC) matter? Drawing on HCT, scholars often assume firm specificity is important since it hinders mobility and allows the firm to capture rent. However, recent work suggests that this effect may be overstated. It requires strong information about human capital as opposed to the coarse signals that employers often rely upon. Thus, a worker moving from a successful firm may have ample opportunities as the firm’s success serves as a signal of the worker’s capabilities – FSHC investments are ignored. Even with strong information, individuals who invest in FSHC may be in demand by firms seeking employees who are willing and able to make such investments. When we consider such market imperfections (at the core of strategy theory), some of the classical HCT logic breaks down.

General human capital as a source of competitive advantage? Recent work in economics (Lazear’s skill-weights model) and the literature on stars focuses on workers who have skills that are valuable across firms. Both literatures point out how valuable and rare such skills can be (at very high levels). The scarcity and imperfect markets suggest that general human capital can be a source of advantage. Such people may be much more scarce and much less mobile than is assumed in classical HCT. Practitioners focus extensively on this type of knowledge. Can it lead to an advantage?

What is competitive advantage? From this, we might ask some more fundamental questions about competitive advantage, firms, and ownership. Most scholars implicitly adopt an agency theoretic view where shareholders are the only residual claimant and competitive advantage is therefore rent that flows to shareholders. Any value that flows to employees is considered not to have been captured by the firm. Joe Mahoney points out that shareholders would be the sole residual claimants if all factors are traded in perfectly competitive markets (e.g., wage = MRP). For this to be true, firms would have to be homogeneous and human capital would need to be a commodity. As such, this logic assumes away the possibility of competitive advantage altogether. If firms are heterogeneous and there are factor market failures, shareholders would not generally be sole residual claimants. What, then, is competitive advantage? (more…)

7 May 2014 at 5:37 pm 3 comments

Need Examples of Subversive Behavior in M&A

| Russ Coff |

I just finished teaching a simulation exercise to BBA students on the politics of post-acquisition integration. I was surprised that students had a great deal of trouble believing that managers would be subversive even in that kind of setting. If there are specific examples of such subversive behavior that you know about, I’d appreciate it if you would post here or email them to me.

Here are some details about the exercise (and a Dilbert cartoon) in case anyone is interested. (more…)

8 October 2009 at 4:25 pm 2 comments

Wanted: Human Capital Research(ers)

| Russ Coff |

Human Capital Interest Group? First a self-serving announcement. I’m part of an effort to create a new SMS interest group on Human Capital & Competitive Advantage (HC&CA). I need to gauge interest and identify people who would want to be involved if the proposal moves forward. We need people who are interested in: 1) Program Chair or Associate Program Chair, 2) Launch Planning Committee, or 3) Friends of HC&CA (email list). Please nominate yourself or others here.

General Human Capital and Competitive Advantage. Now for the meat: Why I think human capital is such fertile ground. Strategy research tends to adopt very unrealistic assumptions about markets for human capital. As a result, shorthand like “firm-specific” human capital inaccurately reflects its strategic potential. (more…)

1 September 2009 at 5:46 pm Leave a comment

Navigating a Process of Integrating Co-Authors’ Diverse Mental Models

| Russ Coff |

Not long ago, Peter mentioned his  heavily downloaded SEJ article (with Nicolai, Yasemin, and Joe). They argue that entrepreneurial teams have a greater potential for competitive advantage than individuals if positive team dynamics allow them to draw upon members’ diverse mental models.

My related working paper unpacks positive team dynamics across the variance generation and selection stages of creativity. In a nutshell, the required group mood differs markedly between the two stages and many teams are unable to navigate the divide.

Ironically, this paper has, itself, been a journey to meld co-authors’ diverse mental models. (more…)

15 August 2009 at 10:17 am 4 comments

Will Mitchell’s Comments on Receiving the BPS Irwin Award

| Russ Coff |

A big congratulations to Will for winning this prestigious award. It is really something to hear a person’s students describe how their mentor has altered their lives. Many misty eyes in the room…

Embedded in Will’s comments after receiving the award was an observation that in many business settings, such as in developing countries, effective business decisions cannot be made using the risk-based tools (like NPV) that are so often taught in business schools. He argued that, in the face of Knightian uncertainty, these tools fail miserably.

So what would be a set of tools to address uncertainty? The closest that I teach would be scenario analysis and real options. Here, one still needs to estimate parameters like the volatility of the investment or probabilities of outcomes (for decision trees or binomial trees). Of course, the assumption that these parameters could be known still suggests reflect risk rather than uncertainty. However, I emphasize sensitivity analysis (such as simulations, etc.) on these parameters to address the fact that they cannot be known.

First, is this the best set of tools available for Knightian uncertainty?

Second, is Will right that these are left out of most strategy courses? Perhaps we need to re-think the curriculum a bit…

10 August 2009 at 7:30 am 4 comments

What Are the Bounds on the Right to Healthcare?

| Russ Coff |

My last blog dealt with the efforts to reform U.S. healthcare to reduce costs. Now I turn to the other key objective of achieving universal coverage. This seems at odds with lowering costs since covering 46 million uninsured people would not come cheap.

As Karl points out in his comment to my earlier post, many believe that healthcare is a right. Certainly there is an ethical and moral obligation to help those who are ill: it is part of the oath to which all physicians pledge as well as the UN charter.

But how far does this right extend? What level of healthcare is a human right and what level becomes a luxury? This is a very practical question. Currently there is a proposal for a luxury tax on insurance plans that offer too much coverage (Listen on NPR). Clearly some believe it is no longer a human right at that level. . . .

But let’s unpack the 46 million uninsured. (more…)

2 August 2009 at 10:10 pm 8 comments

Organizations, Markets, and Health Care Reform

| Russ Coff |

Amidst the fierce debate about the U.S. health care system is a raving lack of clarity. At the core, is whether organizations and markets fail to produce an optimal solution. Even the most neoclassical of economists these days acknowledge that market externalities exist and that these should be the focus of government intervention. Unfortunately, I don’t feel that the debate has been rigorous or well-informed in defining the market failure or why a government run system would be superior.

Liberal Economist Paul Krugman explains why markets fail summarizing Kenneth Arrow’s arguments (here). Basically, the third-party payee system and the information asymmetries render comparison shopping ineffective (and hence competition fails to yield an optimal solution).

Indeed, there is a good bit of inefficiency in the current U.S. system. A recent NY Times article notes that health care costs the average U.S. household $6,500 more each year than other comparable wealthy nations. Unfortunately, looking at many of the important outcomes, it appears that consumers are not getting much for their money on many dimensions (e.g., chronic disease outcomes). So it should be possible to lower costs and improve outcomes. Of course, this ignores the question of whether costs are higher to subsidize R&D that ultimately spills over into other countries.

Unfortunately, the article continues to point out how the reform efforts seem to ignore this low-hanging fruit. (more…)

30 July 2009 at 10:54 pm 7 comments


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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
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