In part two of this three-part series on ‘Making HR truly strategic’, Jon Ingham explores how HR transitioned from being a support function of the business to being the key driver of business success.

It is an exciting time in HR currently, as so many shifts towards a more human-focused workplace are all taking place at the same time. These include the growing use of journey mapping, design thinking, reducing hierarchies, self-managed teams and new organisation models like Holacracy.

However, if we are going to take full advantage of this combination of forces, it is important to realise that their benefits relate to more than just providing employees with a more compelling experience or helping businesses to better recruit, motivate and retain these employees in order to become more profitable and / or grow much faster.

HR and competitive advantage

What we are actually looking to achieve is competitive advantage (or in the public and voluntary sectors, transforming services and better meeting missions, or satisfying stakeholders).

This became clear to me a few years ago when the business school I was lecturing at asked me to deliver a course on strategic management for executive MBA students.

Since all of my other lecturing was around HR and change management, I felt I needed to develop my own knowledge about strategic management first. So I read over 100 books on strategy and, as you would expect, these contained many different theories. But three ideas stood out as the main schools of thought…

1. Competitive positioning

The original ideas around strategic management were all about the external marketplace. For example, Michael Porter’s generic strategies basically suggest just a couple of ways that companies can create competitive advantage. Either they can be a cost leader, producing widgets more cheaply than their competitors, so that every time they sell a widget they gain more margin and therefore become more profitable.

Or they can differentiate their widgets, adding features that not everyone will want, but that enough customers will. This means they can charge more, gain more margin, and also become more profitable.

Porter uses models like the value chain to suggest that organisations need to align their primary activities around this differentiation. However, the value chain also includes secondary or support activities such as HR, which does not play a primary role in competitive advantage, but supports the primary activities to do this.

HR in this approach to strategic management is, by definition, a support function.

2. Core competencies

Given the pace of change and the growing ease with which competitors can copy each other’s competitive positioning, we then saw a growth in focus on internal resource-based strategy.

Particularly Gary Hamel’s idea of core competencies, or bundles of business processes, technologies and knowledge, eg. patents, which allow firms to do particular things well.

The idea is that if a company has the right core competencies, it will be able to continuously develop the competitive positions its products need. But the energy for this comes from the internal core competencies, not the external positioning.

These bundles of core competencies do also include people, just not as a particularly important part. But as people became a small part of competitive advantage, HR started to become a somewhat strategic function too.

Please do not call HR a support function. It is not helpful, as it just closes in our thinking. And it is not true.

3. Organisational capabilities

More recently, many businesses have realised that due to the still accelerating pace of change, their competitors can copy their core competencies too. This forces them to focus even more internally on their people, organisation and culture. We all know that culture is the one thing you cannot just drag and drop from one organisation to another.

Dave Ulrich called this new basis for competitive success organisational capabilities, which is about having the right people and organisational attributes that will enable a firm to continuously develop the core competencies and then the competitive positions it needs.

But the energy for this comes from the organisational capabilities, not the core competencies or competitive positions.

Organisational capabilities are all about people and the organisation – the outcomes we provide for our businesses. This means HR now provides the basis of our firms’ competitive success.

HR is now not just a driver of competitive success in your business – it’s the driver.

Organisation health

This is not just something argued for by HR. One of the most compelling books on the topic, Beyond Performance, argues that given the increasing rate of change in businesses (basically my argument above) the only sustainable source of competitive advantage is now what they call organisation health.

However, organisation health is also about people and the organisation. So this and organisational capabilities are the same thing.

The reason the book is important is that the authors – Scott Keller and Colin Price – were two very senior consultants at McKinsey. So we are now in a position where the pre-eminent firm of business strategy consultants say that your company competes on the people and organisation outcomes you provide to your firm.

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HR is not a support function (by definition)

HR is now not just a driver of competitive success in your business – it’s the driver.

So please do not call HR a support function. It is not helpful, as it just closes in our thinking. And it is not true.

In the days when our businesses competed on competitive positioning we were, by definition, a support function. But now that firms compete on organisation capability and health, we are by definition the most strategically important function your business has.

The need for human focus

The way we provide competitive success is via our human focus.

We need to understand the potential inherent in our people and organisation – and develop approaches that will grow this potential.

What’s more, we need to create value by using these approaches to develop people-oriented business strategies, which offer new or improved organisational capabilities as the basis for competitive success.