HR strategy and competitive advantage in the service sector

Peter Boxall, University of Auckland Human Resource Management Journal, Vol 13 No 3, 2003, pages 5-20

While taking its cue from studies of high-performance work systems in manufacturing, this article examines theory and research on the potential for HR advantage in the service sector, building directly on recent studies of market segmentation and HR strategy in the sector. The article uses these studies, along with strategic management theory, to put forward a new typology of market characteristics, competitive dynamics and HR strategy in services. Three broad types of competition, ranging from mass market to knowledgeintensive services, are identied. This framework helps the article to explore the issue of whether competitive differentiation through human resources is possible only in high-skill areas such as professional services. It argues that opportunities for HR advantage are broader; they exist where quality and/or knowledge are important in competitive strategy. However, seeing the opportunity is not the same as achieving the result. Service rms that identify and pursue these opportunities face the problems of building and maintaining barriers to imitation, and of managing the politics of appropriation. Contact: Peter Boxall, Department of Management and Employment Relations, University of Auckland, Private Bag 92019, Auckland, New Zealand. Email: [email protected]

ne of the most important developments in the literature linking HR strategy and business performance is the growth in studies of high-performance work systems (HPWSs). The publication of The New American Workplace, by Appelbaum and Batt (1994), helped to popularise this term. A subsequent book on HPWSs in US manufacturing, Manufacturing Advantage (Appelbaum et al, 2000), has built on this foundation. This book examines three US industries steelmaking, clothing manufacture and medical electronics manufacture and provides consistent evidence of mutually benecial (win-win) outcomes for rms and workers:
Plant performance in each of the three industries examined is higher on 1 the measures that matter to managers in those industries. The opportunity-to-participate scale derived from the worker survey has a positive effect on worker outcomes as well. We nd no support for the view that more participatory workplaces increase worker stress. Importantly, we nd a signicant improvement in wages associated with the extent of the opportunity to participate.

According to these authors, the work systems and employment models seen as supportive of high performance imply a mix of key practices: more rigorous selection and better training systems to increase ability levels, more comprehensive incentives (such as employee bonuses and internal career ladders) to enhance motivation and participative structures (such as self-managing teams and quality circles) that improve opportunity to contribute (Appelbaum et al, 2000: 26-7, 39-46, 103-4). While there is signicant debate about the particular mix of high-performance practices, one of the
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HR strategy and competitive advantage in the service sector

key arguments running through the literature is that the relevant practices work much better when bundled together (Ichniowski et al, 1996; MacDufe, 1995). The idea is that productivity is best served by the systemic interactions among the practices. Adding only one of the practices is likely to have little or no effect on performance (Ichniowski et al, 1997: 311). Thus, HPWSs imply a high and consistent investment in human resources in order to reap greater benets in the productivity and possibly in the agility of the firm. A map of the commonly hypothesised linkages in HPWSs is shown in Figure 1 (Boxall and Purcell, 2003). As with the work of Appelbaum et al (2000), the gure relies on the AMO rubric: performance is seen as a function of employee ability (A), motivation (M) and opportunity to participate or contribute (O). If practices fostering these variables are enhanced, better use will be made of employee potential and discretionary judgment. In an organisational system that is truly receptive to this kind of work reform, the argument is that outcomes should be superior for both parties. While there is ongoing debate over the extent to which HPWSs generate mutually benecial outcomes (see, for example, Godard 2001a, 2001b; Osterman, 2000; Ramsay et al, 2000), the evidence on the employer side is that there are certain contexts in which such systems are likely to be cost-effective. While some would argue that the key contingency in manufacturing is competitive strategy, a close reading of the evidence suggests that employers more often nd HPWSs cost-effective in high-technology or capital-intensive manufacturing (Arthur, 1994; MacDuffie, 1995; Osterman, 1994; Youndt et al, 1996). This seems to be true irrespective of whether cost leadership or differentiation (or some mix of the two) is being pursued in competitive strategy (Boxall and Purcell, 2000, 2003). In other words, there are clearly parts of manufacturing where employers seek to complement high investment in physical capital with high investment in human capital in order to enhance total factor productivity. To understand this point, it helps to remember that a strategy of cost leadership in high technology or capital-intensive manufacturing rarely means that labour costs are in competition a key point of contrast with the typical situation in services. On the other

FIGURE 1 High-performance work systems: commonly hypothesised linkages

Expanded employee potential and increased discretionary effort

HR practices and operating systems designed and bundled to enhance ability motivation opportunity

Improved company performance

Improved systemic response to employee effort

Improved worker outcomes

Supportive company, industry and societal context

Source: Boxall and Purcell, 2003

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Peter Boxall

hand, in labour-intensive parts of manufacturing, competition is increasingly driven by plant location decisions in order to take advantage of lower labour costs, provided that quality and delivery standards are adequate. Tayloristic work systems and inexpensive HR practices are prevalent in these environments and are likely to remain so as long as they are cost-effective (Boxall and Purcell, 2003). This article is concerned with the possibilities for HPWSs or, expressed more generally, HR advantage in services. HR advantage occurs where a rm builds and sustains competitive advantage substantially through the quality of its human capital and organisational processes (Boxall, 1996). The article examines the links between HR strategy and business performance in the service sector, asking two key questions: How do differences in market characteristics (including the knowledge content of services) lead to different competitive dynamics in services? In what circumstances can service firms build and sustain advantage through superior investments in human resources? The article is structured as follows. It begins by reviewing the literature linking competitive positioning and HR strategy in services. The research discussed here is not an exhaustive review of the literature on work systems and employee relations in services. Rather, it selects those studies that show an awareness of market segmentation or strategic groups in services and which link these to HR strategy. The next section builds on this basis to create a new map or typology of the links from market characteristics to competitive dynamics and HR strategy in services. This analysis helps the article to explore the issue of whether competitive differentiation through human resources is possible only in high-skill areas such as professional services. The article concludes with a set of propositions on the conditions rms must meet to achieve and sustain HR advantage in services. These propositions are offered as a basis for further research, preferably of a longitudinal nature. MARKET SEGMENTATION It is a commonplace to observe that the service sector covers a huge range of human services, varying signicantly in the nature of the work and the level of skill required (Frenkel, 2000; Frenkel et al, 1999). After many years of domination by manufacturing studies in HRM and industrial relations (IR), more scholars are beginning to analyse the links between competitive strategy and HR strategy in services (eg Batt, 2000; Keltner et al, 1999; Lashley, 1998; Peccei and Rosenthal, 2001). The only way we can make any serious progress on the nature of the links between competitive and HR strategies is through frameworks which help us handle the range of service markets and the reality of segmentation within service markets. Studies of markets that allow us to identify competitive segments (on the customer side) (Keltner et al, 1999) and/or strategic groups (on the rm side) are very important (Bogner and Thomas, 1996; Fiegenbaum and Thomas, 1993; Gorman et al, 1996; Peteraf and Shanley, 1997). An industry may have several segments/strategic groups. In each group, rms are 2 seeking to serve a particular set of customer needs in much the same way. As a result, they become significant organisations for each other; benchmarking against other members of the group has obvious benets. In other parts of the industry, rms are seeking to serve other client groups. It is not that easy to shift strategy from one of these groups to another; mobility barriers tend to be quite signicant (Tallman and Atchison, 1996). Major studies in the HR/IR literature which explore market segments or strategic groups include Batt (2000) on call centres in US telecommunications, Eaton (2000) and
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HR strategy and competitive advantage in the service sector

Hunter (2000) on US rest homes, Haynes and Fryer (1999, 2000) on New Zealand hotels, Rispoli (1996) on Italian hotels, Lashley (1998) on UK fast-food restaurants, and Doorewaard and Meihuizens (2000) research on Dutch and German management consultancy rms. These studies show that there are discernible segments in each of these industries where competitive and HR strategies tend to co-vary. Batt (2000), for example, analyses four segments in call-centre work in the US telecommunications industry. These segments vary in terms of the complexity and value of the employee-customer interaction. At the low end there are low-margin interactions of short duration, typically with predetermined scripts and with strong technological monitoring of employees. At the high end there are high-margin, lowvolume interactions relying far more on employee skill and discretion and where technology is much more of an enabler than a monitor. One statistic alone is telling: at the low-margin end, operators deal with an average of 465 customers a day; in the two midrange segments they deal respectively with 100 and 64, and at the top end they deal with an average of 32 (Batt, 2000: 550). Batt nds signicant differences in the contours of HR strategy across these market segments:
Implementation of high involvement work practices varies systematically, according to the demand characteristics of the customer segment served, with the use of these systems more likely in higher value-added markets. Work practices that correlate with customer segment include the type of interaction with the customer; the extent to which technology is used as a control device versus a resource input; the skill requirements of jobs; discretion to influence work methods and procedures; and types and levels of compensation. Batt, 2000: 555

Sectoral studies such as Batts (2000) uniformly support the point that HR strategy is closely connected to competitive differentiation in services. Other compelling examples can be found in the US studies of rest homes cited earlier (Eaton, 2000; Hunter, 2000) where HR investments (in training, pay, career structures and stafng levels) are greater in rms that target higher value niches. Lest these examples be criticised for focusing on less skilled service industries, it is worthwhile pointing out that customer differentiation can also be discerned in professional services. Doorewaard and Meihuizens (2000) study of Dutch and German management consultancies is instructive. Here the authors discern two broad strategic types: rms oriented to efciency and rms oriented to expertise. The former offer standard solution(s) to familiar problems in an efcient way, while the latter promote an individual professionals ability to offer new, client-specific solutions to new, unusual problems (Doorewaard and Meihuizen, 2000: 43). These are tendencies, not hard and fast categories, but they are associated with differentiation in HR strategy. Expertise-driven rms try to hire highly intelligent free spirits and retain them through challenging, high-discretion work, while those oriented to efficiency have a more bureaucratic model of HRM. Starbucks (1992) discussion of knowledge-intensive rms can be used to add a dynamic element to this picture: management consultancies and similar rms may start up as expertise-oriented organisations. Some choose to stay small and stick with their expert culture, while others grow through routinisation and become efciency-oriented in their production systems and HR strategy. There ought to be more research based on longitudinal studies, but there is enough in these studies to suggest that we can do some productive theory-building at this point in time. This is the objective of this article.
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MARKET CHARACTERISTICS AND COMPETITIVE DYNAMICS Two building blocks help us to create a typology linking market characteristics, competitive dynamics and HR strategy in services. One is a typology of work systems developed by Herzenberg, Alic and Wial (1998) (cited approvingly by Batt (2000) and Frenkel et al (2000)). This typology is shown in Figure 2 (overleaf). While not recognising all complexity, it has the value of summarising four readily discernible categories of work, both in service and in manufacturing environments (Herzenberg et al, 1998: 41). Work systems are a critical dimension of HRM and need to be incorporated in any model of the links between HR and competitive strategies (Boxall and Purcell, 2003). The framework developed by Herzenberg et al (1998) stretches from Taylorist work design to high-discretion systems, such as professional work, where Taylorism has rarely intruded. In-between are two other categories: one recognising the large amount of work which is labour-intensive, less skilled and unrationalised by management systems, and another recognising semi-autonomous work that requires midrange skills and is neither high in discretion nor highly constrained. This latter category, covering a lot of sales, clerical and associate-professional work, becomes important in the argument in this article. The other building block is shown in Figure 3 (overleaf). It provides important theory from strategic management, including (but not only) the resource-based view, which is needed to understand competitive dynamics in services. The figure plots service differentiation against business outcomes. Cost leadership is one of the two main competitive strategies analysed by Porter (1985). While ensuring cost parity or proximity is an issue in any strategy (Porter, 1985: 14), rms can also differentiate in various ways. Millers research (1992: 403) concurs with Porters view that cost leadership is one strategic option and provides evidence of three broad types of differentiation: pioneering, salesmanship and quality leadership. His research also argues that possibilities for differentiation vary across industries. Thus, we can expect to find that some service sectors offer greater niche possibilities and have more strategic groups exploiting them than others. Figure 3 recognises variation in the degree of service differentiability and argues that differentiation doesnt necessarily lead to sustained competitive advantage. It helps to dene two broad business outcomes viability and sustained competitive advantage (Boxall and Steeneveld, 1999). Viability with normal prots is the primary goal of the rm, but the gure notes that in certain cases rms remain viable with sub-normal prots (eg because of family nancing). Sustained competitive advantage only occurs where there is a sustained source of superior protability, despite the best efforts of rivals to imitate or outank it (Barney, 1991). We should start at Quadrant C. This is the standard picture of perfect competition, as described in any basic economics textbook. In highly competitive markets (and many low-skill services fall into this category), firms need to be able to offer the relevant bundle of services at adequate quality, but costs are always in competition. Service rms in mass markets need to pay the market-clearing wage for the labour they employ, but are unlikely to pay much more than this because labour costs constitute such a signicant proportion of total costs (Batt, 2000: 547). Over time, rents will be competed away and prots will tend to normalise. In this process, rms that are undercapitalised (which carry excessive nancing costs) or which carry some other form of excess cost will fail (Tallman and Atchison, 1996). In Quadrant A, rst movers in mass-service markets can enjoy temporary windfalls. However, they fall back to Quadrant C, and normal protability, as others execute good
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FIGURE 2 Herzenberg et als (1998) typology of work systems

WORK SYSTEMS
AUTONOMOUS

TIGHTLY CONSTRAINED

UNRATIONALISED LABOUR-INTENSIVE Some nurses aides, hotel maids, domestics, long-distance truck drivers, childcare workers, clerical homeworkers Clerical and administrative jobs with relatively broad responsibilities, low-level managers, some sales workers, UPS truck drivers Volume and quality vary Physicians, high-level managers, laboratory technicians, electricians, engineers

SEMI-AUTONOMOUS

HIGH-SKILL

EXAMPLES

Telephone operators, fast-food workers, cheque proofers

HR strategy and competitive advantage in the service sector

MARKETS SERVED

High volume, low cost; standardised quality

Low cost, low volume; often low or uneven quality

Low volume (each job may differ); quality is often in the eye of the beholder Little High

TASK SUPERVISION Moderate

Tight

Loose

Moderate

FORMAL EDUCATION

Low to moderate

OF WORKERS

Low to moderate (skill often unrecognised)

ON-THE-JOB TRAINING

Limited

Some informal, unrecognised learning from other workers

Limited to moderate

Substantial

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Source: Abridged from Herzenberg et al, 1998: 42-3

Peter Boxall

FIGURE 3 A typology of competitive strategies and business outcomes in services

Sustained competitive advantage (ie sustained above-average prots)

QUADRANT A 1 Premium-branded services in mass markets 2 Firms with unique cost-reduction skills in mass markets QUADRANT C 1 Efcient strategies in competitive markets

QUADRANT B 1 Scarce, inimitable service strategies based on esoteric knowledge 2 Legally and/or physically protected service monopolies QUADRANT D 1 Personal niches with lowered prot goals 2 Firms with inimitable strategies but poor appropriability

Viability with normal or subnormal prot

LOW

HIGH

Extent of service differentiation

imitation strategies (Reed and DeFillippi, 1990; Tallman and Atchison 1996). The only rms that sustain their presence in this desirable space are those that build outstanding brand recognition or which develop unique cost-reduction skills (Bogner and Thomas, 1996; Miller, 1992; Porter, 1985). Those that dominate market share may enjoy reputational advantages in the labour market which help them become more selective than other rms employing low-skilled, highly mobile labour. Lashleys (1998) analysis suggests we might place McDonalds fast food restaurants in this category. Quadrant B contains two stable options. One is the terrain envisaged by Barneys (1991) description of resource-based advantage. The firm is doing something rare, valuable and hard to imitate or out-flank. The classic case here is the knowledgeintensive firm, which competes through valuable but esoteric expertise (Starbuck, 1992). Starbucks case study of the elite New York law firm, Wachtell Lipton, is a celebrated example (Starbuck, 1993). As Coff (1997, 1999) and Kamoche (1996) have pointed out, it is also important to ensure that shareholders appropriate a healthy share of these rents, not an easy thing because key value generators are often well placed to exploit their special knowledge or negotiate for themselves. This is well demonstrated in the second category, where scarce resources stem from legal or physical protections. A famous historical example concerns the early chartered companies (such as the English East India Company and the Hudsons Bay Company) which were granted monopoly privileges in the 17th century (Jones and Ville, 1996). These companies experimented with various ways (such as bonds and oaths) to curb the opportunism of managers intent on amassing personal fortunes. Principal-agent problems were the constant travelling companion of the companies rent-seeking behaviour. Quadrant D notes that service differentiability does not necessarily lead to superior performance. There are two categories here. Small, specialist businesses at the edge of markets can survive as long as it remains sub-economic for the dominant rms that occupy the middle ground to move out to the edges, as argued by organisational ecologists who have developed the theory of resource partitioning (Carroll and
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HR strategy and competitive advantage in the service sector

Hannan 1995: 215-21). It is quite possible that some of these rms develop funding regimes (such as family nancing) and adopt prot goals that are less demanding than would be the case in public companies. A second category involves rms in which there are sources of rent, but executives and/or other value generators capture them. This typically occurs through key executives using the special knowledge and power their positions confer to negotiate exceptional levels of remuneration and bonuses. Sometimes it is accompanied by fraud, as is graphically illustrated in several recent US cases of corporate collapse. Whether or not fraud is involved, these rms fail to deal effectively with what might be called the politics of appropriation. PREDICTIONS: COMPETITIVE DYNAMICS AND HR STRATEGY Figures 2 and 3 help to lay the basis for Figure 4 (opposite), which aims to relate market characteristics in services to competitive dynamics and HR strategy. The first two columns in Figure 4 dene the nature of the market: the type of knowledge used is an inherent feature of the service. Note that key variables referred to in the gure (such as differentiation and discretion) are really located on continua. To simplify things for theory-building, however, it helps to talk about three types. The four types of work organisation referred to in Figure 2 are spread across the three categories here, largely because the tightly constrained and unrationalised labour-intensive systems are typically found in low-cost, mass-service markets (Type 1 in Figure 4) and, to some extent, in Type 2. Both these forms of work organisation are identiable in service sectors, where labour costs are in stiff competition. One simply sees more attempts at Taylorism in some low-margin service sectors than in others. Employers nd Taylorism useful for cost-effectiveness in some sectors, but they see no use for it in others. Similarly, the four types of business outcome identified in Figure 3 are all incorporated into the final column of Figure 4, which outlines predictions for HR strategy. For example, both Quadrant C and A1 in Figure 3 are noted in the Type 1 category in Figure 4 and both Quadrant B1 and D2 are noted in Type 3. Type 1: mass-service markets In mass-service markets, such as gas stations, fast food outlets and supermarkets, key managers or franchisees have critical knowledge, but general labour uses limited, mostly generic know-how. Work design here typically involves one of two types in Herzenberg et als (1998) framework. Some rms adopt Taylorism, while others use unrationalised practices. In both cases, costs, including labour costs, are in competition because customers are very price sensitive. Firms do not generally pay above market-clearing wages unless persuaded to do otherwise by unions and state regulation (see, for example, Hunter, 2000). In their quest to survive in a cost-conscious environment, rms typically substitute labour for technology and self-service. While cost leadership and branding strategies are possible, the dynamics of cost-based competition in mass services have the effect of imposing major constraints on the HR strategies of rms. The key prediction here is that managers t HR strategy to their cost-based competitive strategies through paying only the market-clearing wage and complying minimally with labour laws. There are very limited prospects for HR advantage, except where premium brands can be created and sustained. Apart from the latter case, rms nd that investments in HPWSs are not cost-effective, as Batt (2000: 547, 555-6) argues. This is not an entirely deterministic argument (ie market structure determining HR strategy). It does not rule out rm-level creativity, and certainly not elements of managerial idiosyncrasy (good, bad and
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FIGURE 4 Market characteristics, competitive dynamics and HR strategy in services

TYPICAL WORK DESIGN
IN THE SECTOR STRATEGY IN FIRMS

SERVICE MARKET TYPE

KNOWLEDGE

COMPETITIVE DYNAMICS

PREDICTIONS FOR HR

CONTENT OF SERVICE

Type 1 Mass-service markets (eg petrol stations, fast food, supermarkets)

Low. Key managers or franchisees have critical knowledge, but general labour uses limited, mostly generic know-how

Low discretion. May be highly Taylorised in international franchises or major chains; otherwise unrationalised, low-skill work

Cost-based except to the extent limited by unions and state regulation; substitution of labour for technology and self-service; some branding strategies possible

Firms typically t HR strategy to their cost-driven competitive strategies through paying only the market-clearing wage and complying minimally with labour laws; very limited prospects for HR advantage, except where premium brands can be created and sustained In mass markets, HR strategies are Type 1, but possibilities exist for HR advantage in higher valueadded segments; potential problems with imitability and appropriability

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Type 2 A mix of mass markets and higher value-added segments (eg elder care, hotels, call centres)

Low-to-moderate knowledge levels; mix of skill level needed in the workforce

Traditionally low-tomoderate discretion, but potential for job enrichment and HPWSs

Mix of cost and qualitybased competition; greater prot opportunities for rms that identify higher valueadded segments

Type 3 Very signicantly, if not totally, differentiated markets (eg high-level professional services)

High knowledge intensity

High discretion the natural home of HPWSs

Expertise and quality-based competition, but with some anchors on relative pricing; some services may be routinised and migrate back to Type 2 competition

Extensive opportunities for HR advantage in expertisedriven niches; potential problems with imitability and appropriability; use of lower cost HR strategies where expertise is routinised

Peter Boxall

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HR strategy and competitive advantage in the service sector

indifferent) (Purcell, 1999; West and DeCastro, 2001), but it does underline the severe economic constraints when rms operate in these kinds of service market. Type 2: mix of mass markets and higher value-added segments The case studies cited above show that it is possible to break out of the Type 1 pattern in segments of certain service markets, such as elder care, hotels and call centres, where there is much greater variation in customer preferences and higher value-added customers can be targeted. A mix of skill levels is needed in the workforce (eg nurse aiding, nurses and other professionals in elder care). Jobs are traditionally low to moderate in discretion, but there is clearly potential for job enrichment (see, for example, Eaton 2000). Competitive dynamics, then, are based around a mix of cost and quality-based competition. The key predictions for HR strategy are twofold. In massservice segments, HR strategies will remain Type 1, but rms can discover possibilities for HR advantage in higher value-added segments. In these segments, investments in creating HPWSs are likely to be economically justied. The existence of high skills is not the necessary condition. Skill levels are variable. It is simply necessary that there are protable higher value segments and that it is cost-effective to invest in developing greater employee skills and higher levels of motivation to serve them. Type 3: very signicantly, if not totally, differentiated markets In high-level, professional services and other knowledge-intensive services, work organisation has always involved high levels of employee discretion. This is the natural home of high-performance work systems in the service sector. Firms typically invest in building employee skills, enhancing motivation and providing opportunities to participate. However, following Doorewaard and Meihuizen (2000) and Starbuck (1992), there are two predictions in this model about competitive dynamics and HR strategy. Where high-level services are based on esoteric expertise (with some anchors on relative pricing), competitive strategy and HR strategy virtually merge. It seems silly to make much distinction between them. Committing to hiring certain experts (eg bringing them into partnership) will lead to emergent competitive strategies in their fields of expertise: they are the business. This is why it is helpful to think about competitive strategy in professional service rms in a federalist rather than top-down kind of way (Boxall and Steeneveld, 1999; Greenwood et al, 1990). There are extensive opportunities for HR advantage in these expertise-driven niches (admitting that rms may experience problems with appropriability). Where services become routinised (Doorewaard and Meihuizen, 2000), however, rms end up migrating back to Type 2 competition and one can expect to see greater use of lower cost HR strategies. Barriers to imitation and the problem of appropriation The discussion so far identies opportunities for forms of HR advantage. However, it tends to suggest that seeing the opportunity will consistently lead to the result. This is obviously not the case. We need to push our dynamic analysis further. Management will need to foster barriers to imitation because sources of HR advantage will inevitably become subject to competition from without and also from within. Imitative forces may set in more quickly in Type 2 competition because quality strategies are more easily imitated than those based on esoteric knowledge (Type 3) (Barney, 1991; Coff, 1999). As an aside, this has certainly been the case in automotive manufacturing, where quality is now a table stake rather than a source of advantage (Leonard,1998). External competition for rents (sources of superior protability) implies the rm needs to foster such barriers to imitation as path-dependence, social complexity and
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causal ambiguity (Barney, 1991; Wright et al, 1994). Arguably, path dependence, or unique timing and learning, plays the primary role in creating barriers to imitation because it generates firm-specific assets and leads to social complexity and some degree of causal ambiguity (Boxall and Purcell, 2000, 2003). This argument is supported by the Tallman and Atchison (1996) model of competence-based competition in which the timely and sustained investments of innovators and fast followers in a strategic group progressively exclude others from the game. Both innovators and fast followers have good targeting and timing: other firms dont. They then need to exploit this timing with a system of resources (physical, human and organisational) that further differentiates the firm from others outside and, to some extent within, its strategic group (Tallman and Atchison, 1996: 355-7). Management skills in fostering ongoing, systemic learning must play a large role in any successful story of sustained competitive advantage (Boxall and Purcell, 2003; Leonard, 1998). Such skills need to be strongly embedded in the rms routines and meta-routines (such as environmental sensing and strategic planning), and not solely dependent on heroic leaders, if they are to withstand imitation (Boxall, 1998; Mueller, 1996). There is thus an important role for an astutely formed HR strategy, for a blend of people-management practices and investments which helps the rm to develop innovative and agile behaviour, while not neglecting the stable harvesting of its existing operations. Internal competition for rents (Coff, 1997, 1999; Kamoche, 1996) implies that the rm will need to negotiate a suitable appropriation regime (Kamoche and Mueller, 1998: 1033). As with the problem of external competition for rents, HRM (broadly dened) plays an important role. Governance systems in the firm, including methods of managing managers, will need to ensure that rents are fairly split between investors, managers and other value creators. Clearly, executive management should not be the sole author of these systems: management is both an asset and a liability where appropriation is concerned. Executive managers have serious bargaining power because they have oversight of the production of tacit knowledge the very tacit knowledge that generates sustained advantage gives key managers the power to dominate appropriation (Coff, 1999). As a result, investor representatives need to play a key role in the politics of governance, but contemporary debate about executive pay shows that this is far from easy. CONCLUSIONS The broad argument in this article is that the match, or fit, between competitive strategy and HR strategy is greater in services than it is in manufacturing. This is because competitive strategies of cost leadership and differentiation are both likely to imply high HR investment in capital-intensive or high-tech manufacturing. A strategy of cost leadership should not be equated with wage-based competition at this end of manufacturing. Management thinking about HR strategy in manufacturing is influenced by the employee-technology interface, not simply by the firms desired competitive position. As in any sector, it is also, of course, inuenced by employee responses, and by labour markets and labour law, among other factors (Boxall, 1996). In services, however, one learns more about the likely shape of management strategy in HRM by looking closely at what is occurring at the employee-customer interface (Batt, 2000: 542). Studies of market segments and strategic groups in services demonstrate the strong links between competitive and HR strategies. This article argues that cost-based, low-margin competition in mass services tends to drive out the possibilities for HR advantage, except where rms can fund greater HR investment out
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HR strategy and competitive advantage in the service sector

of premium branding. Where labour is plentiful, the only real constraints on this form of competition stem from effective forms of unionism and enforced regulation. It is outside cost-based service competition that we can talk about possibilities for sustained advantage through the quality of human capital and organisational processes. The analysis here suggests that it is not simply high-level, knowledge-intensive services where the possibilities for HPWSs exist. Wherever there are important customer segments that extend beyond mass, low-cost services, there is potential for a pay-back from greater investment in human resources. Key studies on service markets such as call centres (Batt, 2000) and elder care (Eaton, 2000; Hunter, 1999) lead directly to this thesis. We ought, then, to avoid the impression that high-performance work systems are a category that is exclusive to certain elite industries. Rather, HPWSs are potentially available to a wide range of sectors. Putting the point more generally: there are work reform possibilities in many industries, where both parties might benet or where one party might benet while the other is not, overall, disadvantaged. As a basis for further research, preferably of a longitudinal or history-sensitive nature, this article implies that ve conditions must hold for HPWSs to be feasible in a rm operating in services. 1 The customer proposition A viable group of customers (an economic segment) must value some form of differentiation (eg higher quality of service or unique expertise). This can occur in midrange (Type 2) as well as knowledge-intensive services (Type 3). It can also occur in mass services (Type 1), where a rm creates and sustains premium branding, but the nature of Type 1 competition is such that this is much less likely. 2 The HR proposition Skills of workers do not have to be absolutely high, but the increments in know-how and in motivation that support the competitive differentiation must be a) achievable and b) economically worthwhile (cost-effective). 3 The non-HR proposition The business must have sufcient nancial capital to support an HR premium (a higher level of investment in selectivity, training, pay, career structures etc). 4 The cognitive and political proposition Management needs the insight and political will to identify and meet the customer proposition through the right mix of HR and non-HR investment. 5 The inimitability and appropriability proposition In order to sustain and exploit a source of HR advantage, management will need to foster barriers to imitation, particularly those associated with path dependence: astute targeting and timing, and ongoing, systemic learning. The rm will also need to effectively manage the politics of appropriation. The argument, then, is that the potential for higher value market segmentation, not absolutely high skill levels, is decisive in creating a rationale for HPWSs or space for HR advantage in services. This is the point expressed in propositions one and two. Proposition three is needed because human and non-human resources are bundled in the rm (Penrose, 1959; Mueller, 1996): greater nancial capital is needed to fund an HR premium. The fourth proposition is added because rms are managed entities, where cognitive limits and internal politics can always get in the way of a good idea (Simon, 1947; Child, 1972, 1997). Finally, not only must management be able to identify and act concertedly on the HR opportunity, but proposition ve reminds us that management will also need to foster barriers to imitation and the rm will need to develop a suitable appropriation regime (Kamoche and Mueller, 1998). These are critical elements in any
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dynamic explanation. In other words, sources of HR advantage become subject to competition from without and, not least, from within (Coff, 1999). Management has a vital role to play, particularly in decisions about the targeting and timing of strategies and the related bundling of resources, and in the orchestration of ongoing, systemic learning. However, the centrality of management in this process also creates signicant agency risks which, it goes without saying, should not be managed exclusively by executives. All of this implies a critical role for astutely formed HR strategy. It helps to think about this role on two levels. On the rst level, there is clearly a strategic question about which mix of HR practices and investments constitute an HPWS in a particular rm and sector. The current literature in the area is obsessed with this question, but it is typically approached in a static manner. There is a second, more dynamic level on which HR strategy should also play a role. This level is concerned with shaping the managerial and broader context in which HPWSs are conceived, evolved and defended. Acknowledgements I am grateful to two anonymous reviewers for helpful suggestions. Notes 1 For example, machine uptime in the steel industry and sewing throughput time in the apparel manufacturing industry. 2 For the sake of the theoretical argument and for ease of discussion, rms are assumed to be single business units. In reality, rms are often more complex. They may be competing in various industries and strategic groups. REFERENCES Appelbaum, E. and Batt, R. (1994). The New American Workplace, Ithaca, New York: ILR Press. Appelbaum, E., Bailey, T. and Berg, P. (2000). Manufacturing Advantage: Why HighPerformance Systems Pay Off, Ithaca: ILR Press. Arthur, J. (1994). Effects of human resource systems on manufacturing performance and turnover. Academy of Management Journal, 37: 3, 670-87. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17: 1, 99-120. Batt, R. (2000). Strategic segmentation in front-line services: matching customers, employees and human resource systems. International Journal of Human Resource Management, 11: 3, 540-61. Bogner, W. and Thomas, H. (1996). From skills to competences: the play-out of resource bundles across bundles in Dynamics of Competence-Based Competition. R. Sanchez, A. Heene and H. Thomas (eds). Oxford: Elsevier. Boxall, P. (1996). The strategic HRM debate and the resource-based view of the rm. Human Resource Management Journal, 6: 3, 59-75. Boxall, P. (1998). Achieving competitive advantage through human resource strategy: towards a theory of industry dynamics. Human Resource Management Review, 8: 3, 265-288. Boxall, P. and Purcell, J. (2000). Strategic human resource management: where have we come from and where should we be going? International Journal of Management Reviews, 2: 2, 183-203. Boxall, P. and Purcell, J. (2003). Strategy and Human Resource Management, Basingstoke and New York: Palgrave Macmillan.
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