Context Is Everything

We emphasize that these six factors operate as a system in which they interact with, balance, and complement one another and their various parts. Of course, this human capital strategy system exists within the context of larger systems, just as one’s family “system” resides in a social system, an ecosystem, and a political system. In the case of organizations the human capital system must fit and complement other systems—the company’s marketplace, its business model, and its strategy for financial and physical asset management (including technology). Effective decision making must take into account those points of context.

We will talk more about this system’s reality in Chapter 1 because ad hoc or silo-based decisions are always suboptimized, and usually dysfunctional, when they are made without regard to the overall system.

Together with the market and the business model context, the human capital system inherently shapes the unique character of a company. That creates two potent competitive advantages. First, the sum of a company’s human capital practices is relatively stable and persistent, typically more enduring than the effects of technology and financial capital. Second, because it is unique to its context and goals, a successful company’s system for managing human capital is very difficult to copy. Indeed, what works well for Company A is unlikely to work for Company B. A copycat may try to adopt two or three “best practices” from a top company, but that approach will not produce great competitive advantages. Why? Because the best practices of the highly successful company are part of its system of interrelated practices and values. It is the sum of a company’s whole system that makes a company great. Thus, copying one or two discrete practices produces one of two outcomes: The first result is that the transplanted tactic works but generates no competitive advantage because, since it’s easily adopted, it quickly becomes a new standard used by most companies. The second, more likely outcome is that it fails—sometimes quietly, sometimes stunningly—because the “borrowing” company can’t copy all the other factors that support and interact with the adopted tactic at the great company. In other words, it doesn’t fit into that company’s unique context.

Our work shows that these two competitive advantages—longevity and inimitability—hold true even for close competitors in the same industry. Think about trying to copy a successful rival’s entire system. Consider what would happen if BMW decided that the only way for it to be ultimately successful would be to transform itself into another Toyota and then beat Toyota at its own game. Or if Oracle aspired, as impossible as that might be, to copy Microsoft. Or Komatsu chose to model itself after Caterpillar.

Each would struggle for years to emulate its competitor. It would have to change long-standing values, practices, and policies. It would have to match its workforce to the new strategy. It would have to train people for new ways of doing things. Key people would leave in disgust or have to be replaced because they weren’t “wired” to lead or perform in the new system. There would be major turmoil before there were results. It would take years—if it were even possible. (Paradoxically, companies can change their business models more easily than they can change their human capital strategies.)

Thus a company that gets its system of people management “right” has an extraordinary competitive advantage over its rivals. It will obtain better performance from what is often its largest asset and won’t have to worry about its rivals copying the key to its success. In doing this, a company is playing to its strengths.