What are the potential risks for organizations considering integrating business strategies with an emphasis on positive social change?

Strategy, human resource management and performance: Sharpening line of sight☆

Paul F. Buller a,⁎, Glenn M. McEvoy b,1

a School of Business Administration, Gonzaga University, Spokane, WA 99258-0009, USA b Department of Management, Utah State University, Logan, UT 84322-3555, USA

a r t i c l e i n f o a b s t r a c t

This paper builds on previous theory and research on strategy and human resource manage- ment to identify important linkages between the firm’s strategy, its human resources, and performance outcomes. First, we review the relevant literature focusing in particular on the role of human resources in creating competitive advantage. We then present a multi-level model illustrating how human resource management practices can effectively align organiza- tional, group and individual factors with the organization’s strategy. We redefine line of sight as the alignment of organizational capabilities and culture, group competencies and norms, and individual KSAs, motivation and opportunity with one another and with the organization’s strategy. Further, we propose that such alignment contributes to the creation of human capital and social capital, both of which are necessary to achieve and sustain superior performance. We conclude the paper with some implications for future research and practice.

© 2011 Elsevier Inc. All rights reserved.

Keywords: Strategic human resource management Line of sight HRM and performance

Contents

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 2. Strategy and human resource management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 3. “Line of sight” revisited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 4. A model for sharpening line of sight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0

4.1. Organizational capabilities/culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 4.2. Group level competencies/norms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 4.3. Individual KSAs/motivation/opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 4.4. Measuring performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 4.5. HRM practices and line of sight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0

5. Summary and implications for future research and practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 5.1. Implications for research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 5.2. Implications for practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0

Human Resource Management Review 22 (2012) 43–56

☆ The authors would like to thank Kim Boal, Wendy Boswell and two anonymous reviewers for their helpful suggestions on this manuscript. ⁎ Corresponding author. Tel.: +1 509 313 3438; fax: +1 509 313 5811.

E-mail addresses: buller@jepson.gonzaga.edu (P.F. Buller), glenn.mcevoy@usu.edu (G.M. McEvoy). 1 Tel.: +1 435 797 2375; fax: +1 435 797 1911.

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1053-4822/$ – see front matter © 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.hrmr.2011.11.002

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1. Introduction

Theories of strategic management have historically acknowledged the importance of internal activities, resources or capabil- ities as potentially important sources of competitive advantage. Porter’s (1985) seminal work on competitive advantage acknowl- edged the need to effectively link an integrated configuration of internal value chain activities to the intended business strategy. Subsequent work on strategic management has focused on resource- and knowledge-based views of the firm, arguing that inter- nal resources are essential to building and sustaining competitive advantage (Barney, 1991; Grant, 1996). Central to emerging perspectives on strategy is the role of the firm’s human resources in creating and sustaining superior performance through human and social capital (Wright, Dunford, & Snell, 2001). Indeed, there is growing evidence that human resource management practices can positively affect organizational performance (Boselie, Dietz, & Boon, 2005; Combs, Liu, Hall, & Ketchen, 2006; Huselid, 1995). However, the specific mechanisms by which human resources affect firm performance are not clearly understood (Collins & Smith, 2006; Guest, 2011; Paauwe, 2009).

The purpose of this paper is to build on previous theory and research on strategy and human resource management to identify important linkages between the firm’s strategy, its human resources, and performance outcomes. Specifically, this paper extends the work of Boswell and her colleagues (Boswell, 2006; Boswell, Bingham, & Colvin, 2006; Boswell & Boudreau, 2001; Colvin & Boswell, 2007) to present a framework for creating a clear “line of sight,” from strategy to implementation at all levels of the firm– organizational, group, and individual. As originally conceived, “line of sight” (LOS) refers to an employee’s understanding of the firm’s strategic goals as well as the actions necessary to accomplish the goals (Boswell et al., 2006). Boswell (2006) found that employees’ understanding of how to contribute to the organization’s strategic goals was more important than understanding those goals per se. However, while this study shed some light on the relation of LOS to individual employeework outcomes like job satisfaction and turn- over, only a modest amount of variance was explained by the LOS construct. Further, Boswell’s LOS framework focused only on the individual level of analysis. Boswell (2006) acknowledged the limitations of her model and recommended that future conceptualiza- tions and research also include group and organizational level factors to develop a more comprehensive understanding of the mech- anisms influencing LOS. Several other authors have cited the need for multi-level or cross-level models to more fully examine the relationships among various contextual variables, HRM practices, employee behaviors, and performance outcomes (Guest, 2011; Ostroff & Bowen, 2000; Paauwe, 2009). This paper redefines the LOS framework by including group and organizational levels of anal- ysis, and by creating a more complete model of the relationships among strategy, human resource management, and performance. Our proposed model shows how strategically aligned HRM practices contribute to the creation of human capital and social capital, both of which are necessary to achieve and sustain superior performance.

This paper is organized as follows. First, we review the relevant literature on strategy and human resource management, focusing in particular on the role of human resources in creating competitive advantage. The resource-based view (RBV) provides the overarching theoretical foundation for our framework linking strategy, human resource management and performance. From an RBV perspective, HRM practices are thought to create human capital and/or social capital that lead to superior performance. While recognizing that RBV has been criticized on several fronts (Kraaijenbrink, Spender, & Groen, 2010), we believe that it pro- vides a useful meta-framework to explain how firms can achieve and sustain superior performance by effectively aligning strat- egy and human resource management practices to create both human and social capital. We then present a model that illustrates how human resource management practices can effectively link organizational, group, and individual activities with the firm’s strategic goals. The primary argument advanced in this paper is that organizational performance will be enhanced to the extent that organizational capabilities and culture, group competencies and norms, and employee skills, motivation and opportunity are aligned with the firm’s strategic goals (i.e., there is a clear “line of sight”). This multi-level framework goes beyond previous con- ceptualizations of LOS to incorporate organizational and group factors that facilitate the effective formulation, implementation and adaptation of strategy. We conclude the paper with some implications for future research and practice.

2. Strategy and human resource management

Strategy has been conceptualized at three levels. At the corporate level, strategy is concerned with the business or range of businesses the corporation wishes to compete in. Porter’s (1980) industry analysis model has been influential in elucidating the economics of an industry (or industry segments) and its profit potential. At the business level, strategy is concerned with the question of how to compete for the hearts and minds of the customer. Again, Porter’s work on generic strategies (i.e., cost leadership, differentiation and focus) has been influential in our thinking as has his work on value chain analysis (Porter, 1985). In addition, the influence of SWOT analysis and RBV (Barney, 1991) has been seminal in addressing strategy questions at these two levels. The final question strategy addresses is: how does one coordinate and control the various functional areas, such as finance, accounting, marketing, production, research and development, and human resource management, in a way that supports the corporate and business strategies? Here again, value chain analysis and RBV have made important contribu- tions, as has more traditional work that focuses on environment, systems, and structures. However, it is our contention that human resource management and LOS are especially important in connecting functional level strategies and tactics with business and corporate level strategies.

The importance of human resource management to effective implementation of strategy has been recognized for some time. Porter (1985) explicitly acknowledged that human resource management was an essential support activity that, when integrated with other value chain activities, is necessary for a firm to achieve and sustain competitive advantage. A prominent perspective that potentially explains the strategic importance of human resources is the resource-based view of the firm (Barney, 1991;

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Barney & Wright, 1998; Beltran-Martin, Roca-Puig, Escrig-Tena, & Bou-Llusar, 2009; Boxall, 1996; Phan, Chan, & Lee, 2005). The resource-based view proposes that a firm is defined by the resources it controls. Further, it assumes that all competitors are not homogeneous but, rather, they differ on the resources that they possess. These resource-based differences explain differences in performance across firms. If a firm possesses resources that are valuable, rare, non-imitable, non-substitutable, non-transferable, and the firm has the organizational capability to exploit these resources, it possesses a sustainable competitive advantage (Barney, 1991). Barney (1991, 1995) and others (Boxall, 1996; Carmeli & Schaubroeck, 2005; Pfeffer, 1994; Senge, 1990) have argued that certain firm-specific intangible sources of advantage (such as organizational history, culture, learning, and other human dimensions of organizations) can be particularly important to sustaining competitive advantage precisely because they are valuable, rare and extremely difficult to imitate and substitute for. Consequently, much recent theoretical and empirical work has focused on human resources and human resource management practices as essential sources of competitive advantage. Human resources and human resource management activities are strategically important because they are potentially valuable, rare, difficult to imitate and substitute for, and they are central to creating the organizational capability to enact the firm’s stra- tegic goals. We think this is particularly important when firms face competition based on possessing, communicating, and creat- ing superior knowledge, human capital, and social capital versus having superior land, capital, or technology. We also argue that HRM practices are particularly important when firms choose to grow through mergers and acquisitions (see, for example, Allred, Boal, & Holstein, 2005) or firms seeking to grow their international operations especially when those operations involve very dif- ferent cultures from the home country (Manickavasagam, 2006).

We use RBV as the dominant theoretical framework for our proposed model. As noted, RBV has been used by other researchers as a framework for examining the HRM–performance relationship. What is missing from many of these previous examinations is the link between strategy and human resource management practices. For example, oft-cited studies by Huselid (1995) and Combs et al. (2006), among others, examine the performance effects of various configurations of HRM practices. The questions of strategy are not explicitly addressed. How do HRM practices and systems contribute to strategy formulation and implementa- tion? What strategic value do they create? From our perspective, the value dimension of RBV is defined by the value added of the HRM function and practices to the formulation and execution of strategy. Without this explicit connection, it is difficult to argue that HRM practices have any strategic significance. RBV has been criticized (Kraaijenbrink et al., 2010) in part because it has not clearly defined value and resources. In our view, a resource is valuable only to the extent that it contributes to a firm’s ability to create and execute a strategy that leads to other, more valuable resources (i.e., sustainable superior performance). Using the value chain framework, value chain activities are strategically relevant to the extent that they add value relative to costs, thus contrib- uting to increased profit margins, and ultimately, to superior returns on investment. In this sense, HRM practices are valuable strategic resources only in so far as they provide for the creation and maintenance of other resources to effectively plan and execute the firm’s strategic priorities. Viewing HRM practices in this way helps to overcome the criticism that RBV is a tautology. Strategic HRM practices can create and maintain additional valuable strategic resources that, when combined, lead to even more value in the form of sustained superior performance.

There has been extensive research on the relationships among strategy, human resources, human resource management prac- tices, and firm performance. Although empirical work suggests that HRM practices can positively impact firm performance (Boselie et al., 2005; Combs et al., 2006; Guest, Michie, Conway, & Sheehan, 2003; Huselid, 1995), the specific ways in which these practices affect organizational outcomes are not clear. This uncertainty is due to the fact that studies differ widely with respect to theoretical foundations, levels of analysis, definitions of HRM practices, and measures of performance (Guest, 2011; Paauwe, 2009). For example, some studies employ “best practice” perspectives, arguing that certain HRM practices (e.g., high per- formance work systems) can be universally applied to all firms (Huselid, 1995; Pfeffer, 1994). Others examine contingency frame- works arguing that the appropriate HRM practices depend on contextual variables such as business strategy or environment (Chandler & McEvoy, 2000; Schuler & Jackson, 1987; Wood, 1999; Wright & Snell, 1998). Previous studies also differ on depen- dent measures of performance, some focusing on various financial outcomes (sales, profits, growth), others on organizational out- comes (productivity, quality, efficiency), and still others on HR-related outcomes (attitudes, behaviors, intentions of employees) (Paauwe & Boselie, 2005). In summary, there is a need for a more comprehensive theoretical framework and empirical validation of the relationships among strategy, HRM practices, and performance. In this regard, simply linking HRM practices to business strategy is not enough. Ultimately, organizations must connect people, with the requisite abilities and motivation, to complex, dynamic, and fragile organizational objectives and work requirements in order to affect lasting performance outcomes (Boswell, Wright, & Snell, 2000; Overholt & Granell, 2002; Paauwe & Boselie, 2005).

Strategy theorists and researchers have explored the relationship of an organization’s people resources to organizational per- formance. Various authors have argued that human and social factors can affect performance by contributing to an organization’s core competencies/capabilities (King & Zeithaml, 2001; Lado &Wilson, 1994; Leonard-Barton, 1992), dynamic capabilities (Teece, Pisano, & Shuen, 1997), knowledge-base (Grant, 1996), social networks (Collins & Clark, 2003), or learning capability (Kang, Morris, & Snell, 2007). In general, these theories suggest that firm-specific capabilities, such as knowledge, skills, abilities, behav- iors, processes, practices and systems, are sustainable sources of competitive advantage. Implicitly or explicitly, these strategy frameworks point to the critical role of the firm’s human capital (people) and social capital (relationships and interactions among people) in determining long-term performance (Wright et al., 2001). However, theory and research in the strategy liter- ature tend to be focused at the organizational level of analysis and do not explicitly explain how human capital and social capital are created through HRM practices or how they are related to group or individual behavior.

In the human resource management literature, several recent studies have attempted to explore the so-called “black box” be- tween HRM practices and performance outcomes. One group of studies focuses primarily on the role of HRM practices in developing

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human capital that directly influences performance outcomes. Human capital is generally defined as the knowledge, skills, and abil- ities (KSAs) individually and collectively contained in the firm’s human resources (Becker, 1964). The assumption of the human cap- ital framework is that certain firm-specific KSAs have a direct effect on employees’ behaviors and, ultimately, on performance. For example, in a study of private and public sector organizations in Israel, Carmeli and Schaubroeck (2005) found that firmswith higher levels of human resource capital (i.e., employees’ education levels, training, work experience, and skills) performed better when top managers perceived that these resources provided distinctive value. In a sample of large Spanish firms, Lopez-Cabrales, Valle, and Herrero (2006) found that valuable and unique core employees (i.e., those with firm-specific knowledge, skills, and abilities) were positively associated with the firms’ competitiveness and efficiency. In another study, Selvarajan et al. (2007) found that an empowerment-oriented human capital philosophywas associatedwith amore innovative culture and greater performance in a sam- ple of Irish firms. These studies suggest that particular kinds of HRM practices of recruitment, selection, and internal employee devel- opment are related to organizational performance. Together, these and other studies point to the role of firm-specific human capital as an important mediator of the HRM–performance relationship (Wright & McMahan, 2011).

Other studies have focused primarily on the role of HRM practices in developing social capital as a means for enhancing per- formance. Social capital refers to the nature of the relationships (i.e., social structures and processes) among people internal and external to the firm (Nahapiet & Ghoshall, 1998). The assumption of this perspective is that firm performance is largely a function of social relationships and interactions that facilitate accomplishment of the firm’s strategic priorities. For example, in a field study of high-tech firms, Collins and Clark (2003) examined the relationships among HRM practices, social networks of top manage- ment teams, and firm performance. The results of this study suggested that the relationship between certain HRM practices (incentive compensation, performance assessment, and training designed to help executives to build effective networking rela- tionships) and firm performance was mediated through the top manager’s social networks. In a related study, also conducted in high-tech firms, Collins and Smith (2006) found that commitment-based HRM practices, such as training and development, compensation, and selection practices designed specifically for knowledge workers, were positively related to social climates of trust, cooperation, and shared codes and language. These measures of social climate were related to the firm’s ability to exchange and combine knowledge, that in turn, were related to firm performance. In another study of high-tech firms in China, Chow and Liu (2007) concluded that both HR capability and incentive systems that shaped the skills and attitudes of employees were sig- nificant predictors of knowledge-related performance. This finding supports the human capital perspective described earlier. In addition, consistent with the social capital framework, this study found that a sharing corporate culture and a supportive reward system, when aligned with business strategy, also contributed to performance. These and other studies highlight the prominent role of social capital as a mediator of the HRM–performance relationship. From the resource-based view, firm-specific social cap- ital is thought to be an important intangible resource that is difficult to imitate largely because of the causal ambiguity and com- plexity of social interactions (Chisholm & Nielsen, 2009).

This alignment between strategy, HRM practices, and performance is the focus of the LOS construct. While most previous work in this area has focused on either human or social capital, our framework posits that both human capital and social capital are critical de- terminants of firm performance. Neither by itself is sufficient to achieve and sustain competitive advantage. As Heinrich von Pierer, for- mer CEO of Siemens AG stated, “having a global workforce of well-trained, highly skilled people obviously isn’t enough; the workforce must be efficiently networked and leveraged to maximize benefits across the company” (von Pierer, 2002, cited in Boal, 2007, p. 74).

In summary, previous research is inconclusive regarding the relationships among strategy, HRM practices, and performance. From a high-level perspective, it is likely that HRM practices are important to producing firm-specific human capital and social capital that, when linked with business strategy, lead to enhanced performance. However, it is not enough to simply create HRM practices and systems that are aligned with strategy. The real challenge is to connect capable and motivated people with complex and dynamic strategic objectives, organizational processes, and resulting work requirements (Ostroff & Bowen, 2000). In other words, there is a need to align the intended strategy with execution by creating the necessary human capital (i.e., clear expectations, capabilities, and motivation of employees) along with the social capital (i.e., relationships, processes, and sys- tems) to effectively implement strategy. A general framework that summarizes the preceding discussion is shown in Fig. 1. The remainder of this paper will build on this general framework to redefine the line of sight concept and present a comprehensive model for better aligning strategy and execution.

3. “Line of sight” revisited

The notion of “line of sight” (LOS) originated in the compensation literature and focused on employees’ perceptions of the link between their job performance and firm-level incentives, such as profit sharing compensation plans (Balcom & Brossy, 1997; Lawler, 1995). Boswell and her colleagues (Boswell, 2006; Boswell et al., 2006; Colvin & Boswell, 2007) extended this concept

STRATEGY HUMAN CAPITAL

HRM PRACTICES PERFORMANCE OUTCOMES

HUMAN RESOURCES SOCIALCAPITAL

Fig. 1. General relationships.

46 P.F. Buller, G.M. McEvoy / Human Resource Management Review 22 (2012) 43–56

and defined LOS as “an employee’s understanding of the organization’s goals and what actions are necessary to contribute to those objectives” (Boswell et al., 2006, p. 500). The assumption underlying the LOS concept is that employees’ knowledge and behavior, aligned with strategic priorities, are keys to achieving positive organizational outcomes. Further, HRM activities are crit- ical to the extent that they motivate employees’ interests and actions in line with the firm’s strategic objectives.

Boswell’s LOS framework builds on several related concepts. First is the person–organization (P–O) fit perspective, which focuses on the alignment of employee values with organization culture (Kristof, 1996). Previous research has shown that when employees’ values fit the organization’s culture, they are more likely to have positive attitudes and less likely to leave the orga- nization (O’Reilly, Chatman, & Caldwell, 1991). In addition, a recent study found that when transformational leaders encourage their followers to perceive higher levels of P–O fit, there is a higher level of perceived work group performance (Hoffman, Bynum, Piccolo, & Sutton, 2011). A second related concept is goal congruence. Research on goal congruence indicates that when employees’ goals are aligned with those of their immediate supervisor, employees have more positive attitudes and higher retention (Vancouver, Millsap, & Peters, 1994). Boswell and her colleagues have augmented the alignment perspectives of P–O fit and goal congruence to explicitly link employees to the firm’s strategic goals. Thus, the LOS concept posits that it is essential for employees to have an accurate understanding of the firm’s strategic goals and also how they can contribute to those goals. Fur- ther, LOS postulates that the benefits of such alignment, beyond those of P–O fit and goal congruence, are that employees will experience greater role clarity (Ilgen & Hollenbeck, 1991) and a greater sense of task significance (Hackman & Oldham, 1976), both of which have been found to be related to improved employee performance.

Although not explicitly addressed by Boswell’s (2006)model, a closely related concept is the AMO (ability–motivation–opportunity) framework (Appelbaum, Bailey, Berg, & Kalleberg, 2000). This framework purports that employees who have the opportunity to partic- ipate in high performance work systems (e.g., decisionmaking, self-directed teams), andwho have the requisite skills and incentives to do so, will perform better than those that do not have these attributes. The opportunity to participate in decision making, team-work, and organizational activities is thought to contribute to two important outcomes for employees: 1) increased trust among managers and employees, and 2) increased intrinsic motivation due to more meaningful and significant work (Appelbaum et al., 2000). AMO has been widely used as a micro-level theoretical framework for examining the HRM–performance relationship (Guest, 2011; Paauwe, 2009). However, AMO is focused primarily on the individual level of analysis and does not explicitly take into account strategy or group and organizational determinants of performance.

In an empirical examination of the LOS framework, Boswell (2006) found that employees’ understanding of how to contribute to the organization’s strategic goals was more important than only understanding the goals. She concluded that:

“It appears that employees who understand how to contribute to an organization’s strategic goals are more likely to feel a sense of belonging (or fit), perhaps since they are better able to work in alignment with the firm’s needs, while this is not necessarily the case for employees that are aware of the strategy but not necessarily know what to do about it” (p. 1504).

While this study shed some light on the relation of LOS to selected individual employee work outcomes (e.g., job satisfaction, commitment, intent to quit, turnover), a very modest level of variance was explained by the LOS construct. Here again it is impor- tant to note that Boswell’s framework focused only on the individual level of analysis — that of individual employee perceptions and outcomes. In this regard, the study shed some light on the contribution of human capital to enhancing individual perfor- mance outcomes. Boswell (2006) acknowledged the limitations of her model and recommended that future conceptualizations and research on LOS incorporate situational variables, including group and organizational level factors, to create a more complete understanding of the mechanisms by which employee actions are aligned with strategic objectives. Toward that end, this paper redefines the LOS concept to include group and organizational levels of analyses that focus on dimensions of both human capital and social capital.

4. A model for sharpening line of sight

Based on the preceding discussion, we define LOS as the alignment of organizational capabilities and culture, group competen- cies and norms, and individual KSAs, motivation and opportunity with one another and with the organization’s strategy. Our pro- posed model is shown in Fig. 2. As illustrated, the framework’s driving force is the firm’s strategy, including its vision, mission, goals, strategic plans, and resulting action plans (tactics). At the core of the model are three distinct, yet interrelated levels of analysis that are directly linked to strategy: organizational, group, and individual. Specifically, the three levels are viewed as building blocks with organizational capabilities/culture as the foundation on which the other two levels — group level competen- cies/norms, and individual KSAs/motivation/opportunity— rest. We suggest that organizational capabilities, group competencies, and individual KSAs are primarily related to human capital; organizational culture, group norms, and individual motivation and opportunity are primarily related to social capital. As shown, HRM practices are central to generating, reinforcing and sustaining organizational capabilities/culture, group competencies/norms, and individual KSAs/motivation/opportunity. Overall firm perfor- mance is a function of the vertical alignment of strategic priorities and actions among these three organizational levels and the horizontal alignment of the HRM practices in recruitment/selection, performance appraisal, training/development, and compen- sation. Important assumptions underlying the model are that the firm’s strategy is linked to the firm’s general and industry environments, and that the firm is continually adjusting its strategy in an attempt to achieve and maintain a competitive position within its external environment. In this regard, although the bold arrows suggest that organizational, group, and individual activ- ities are primarily influenced by strategy, it is important to recognize that these activities are reciprocal and can also influence

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adjustments in strategy. In addition, the dotted feedback loop underscores the dynamic nature of this process. This idea will be discussed in more depth later in the paper.

4.1. Organizational capabilities/culture

Organizational capabilities are the foundation for building strategically relevant HRM practices. The strategy literature has long focused on certain core competencies or core capabilities as being essential to firm performance (Prahalad & Hamel, 1990; Stalk, Evans, & Schulman, 1992). As used here, organizational capabilities are system-level resources, defined by Colbert (2004) as “those organizational capabilities that exist only in relationships— in the interactions between things” (Colbert, 2004, p. 348). These capabil- ities and resources involve both the ability to learn and the ability to change (Boal &Hooijberg, 2000). Theyhave been variously referred to as cultural resources (Wernerfelt, 1989), dynamic capabilities (Teece et al., 1997), knowledge-base capabilities (Grant, 1996), social networks (Collins & Clark, 2003), system-level resources (Black & Boal, 1994) or learning capabilities (Kang et al., 2007). In general, these theoretical frameworks suggest that certain firm-specific capabilities — relationships, processes and systems — are sustainable sources of competitive advantage because they are valuable, rare, and difficult to imitate and substitute for.

Organizational culture is also an important determinant of performance (Denison, 1996). We argue that organizational perfor- mance will be enhanced when employees at all levels share values, assumptions, and beliefs that are aligned with strategic goals and capabilities. Previous theory and research suggest that organizational culture can influence the design of HRM policies and prac- tices, as well as mediate the link between HRM and performance by shaping cultural norms and practices (Bowen & Ostroff, 2004; Denison, 1996). HRM policies, practices and systems affect the perceptions, attitudes and behaviors of individual employees which, in aggregate, affect group and organizational outcomes. For example, recent studies show that high performance work practices (Sels et al., 2006) and high involvement work organizations (Batt & Colvin, 2011) are associated with positive organizational out- comes (e.g., increased productivity, lower quit and dismissal rates). Generally speaking, organizational capabilities and culture in- volve social capital. The preponderance of evidence indicates that social capital has a strong positive effect on firm performance (Westlund & Adam, 2010). However, the existing literature provides little practical advice on how to create core capabilities based on social capital (Chisholm&Nielsen, 2009). In addition, although organizational capability perspectives assume that people are nec- essary elements, they tend to be focused at the organizational level of analysis in most studies.

It is also important to acknowledge the dynamic nature of capabilities and culture. Developing the organization’s capacity to learn from its past, adapt to its present, and envision and create the future are increasingly important. A firm’s competitive advan- tage lies in its ability to create, recombine and transfer knowledge efficiently within the context of a dynamic competitive envi- ronment. This dynamic capability, while difficult to achieve, offers the greatest competitive advantage due to the difficulty of imitation by other firms (Kogut & Zander, 1992; Zhou, Anand, & Mitchell, 2004). The very complex, non-codifiability, and tacit- ness of collective knowledge and shared values require opportunities for frequent interaction, dialog, and feedback among people and groups (Boal, 2007). Human resource management is one of the mechanisms for doing this through its impact on selection, training, socialization and compensation of organizational members.

A relevant concept here is that of organizational citizenship behavior (OCB), defined as voluntary, extra-role behaviors that contribute to “the maintenance and enhancement of the social and psychological context that supports task performance” (Organ, 1997, p. 91). Consistent with our model, OCB can be present at three different levels in the organization: organizational, group and individual (Bentein, Stinglhamber, & Vandenberghe, 2002; Organ & Ryan, 1995). Collective OCB at the organizational level is considered as a shared set of assumptions, beliefs, and values that promote discretionary, extra-role behaviors to maintain and enhance the social and psychological contexts of work. In other words, collective OCB is a component of the organization’s culture. When these collective discretionary behaviors are directed at the accomplishment of strategic goals, they enhance

Line of Sight

Organizational Capabilities/Culture

Group Competencies/Norms

Individual KSAs/Motivation/Opportunity

Human Capital

Social Capital

Strategy Performance

Training/Development Compensation