How HR Strategy Can Help You Gain a Competitive Advantage
The four Ps of marketing – product, place, promotion, and price – certainly present many compelling ways to differentiate your firm’s product or services from those of your competition, and it is often where new entrepreneurs start. However, as you plan to get your business off the ground, you need to consider more than just marketing strategies to achieve a sustainable competitive advantage, no matter which market your firm is in. One of the most important aspects of your business is what is known as your HR strategy and your human capital – you, your team, and your employees.
In this article, we explore, 1) the importance of human capital, 2) HR as a source of competitive advantage, 3) building your team, 4) obtaining business services, 5) subcontracting, and 6) your first (and subsequent) hires.
THE IMPORTANCE OF HUMAN CAPITAL
Effectively and efficiently managing your human capital – moreover, successfully leveraging your human capital to achieve your firm’s strategic business objectives, can help you achieve considerable success in the marketplace. Conversely, failing to do so, through a lack of planning or poor implementation, can result in reduced productivity and profits, and even a poor brand reputation.
Many fledgling entrepreneurs often overlook human resources planning in the early stages of their firm’s creation. Many think that human resources begins when a firm grows large enough to have a formal human resource department – an office, a director, a dedicated budget line, and other hallmarks of a large firm.
However, the truth is that HR strategy starts when a firm is a single person. Whether or not you have a formal written plan for human resources at the start-up stage for how you handle your own entrepreneurial education, compensation, and working hours, HR strategy can set the stage for how you will handle these kinds of decisions when you decide to hire your first employee(s). Similarly, how you acquire business services to fulfill business functions you do not have the time or expertise to fulfill, and subcontractors for those extra services you wish to provide, will lay the foundation for how you make those decisions when your firm grows larger.
Therefore, it is critical that you approach these decisions strategically from the very beginning. Moreover, you do not have to be an expert in HR at this stage to do so. It is critical, however, that you are able to answer these questions:
- What is my firm’s competitive advantage?
- What are the strategies and tactics my firm will use to achieve/maintain/increase that advantage?
- How can I leverage my firm’s human capital to achieve those goals and achieve/maintain/increase that advantage?
HUMAN RESOURCES AS A SOURCE OF COMPETITIVE ADVANTAGE
Let’s explore the ways human resources can help you enhance your competitive advantage, or even help you create a new one:
- You may choose to compete by offering the lowest prices on the market. To do so, you must ensure that your operating expenses are as low as possible to maximize profit. By deriving your human capital from a pool independent contractors and/or offshore, for example, you may be able to minimize HR expenses, which, when combined with other methods of reducing business expenses, may help you achieve significant profits. While many Fortune 500 firms have received significant criticism for the use of offshore vendors, they have leveraged this strategy to achieve tremendous profits.
- A variety of perspectives can yield lucrative ideas about how to differentiate your product or service, or even create new ones. These ideas can come from anywhere, but equity partners, advisory board members, and full- or part-time employees are often the richest source of innovation. 3M’s internal culture is renowned for nurturing employee innovation, by allowing employees a certain amount of time each week to work on projects in which they are interested, even if there is no immediate application. Often, these kinds of projects have led to some of 3M’s most popular products, such as the Post-It note.
- Highly skilled employees may allow you to offer a superior product for which you can charge a premium. Such is the case with luxury products/services, as well as most firms that are competing based on the quality of their products/services. While it may cost you more to recruit and/or train and retain highly skilled employees who can add value to your offerings, that cost can be passed to the consumer in the form of premium pricing.
- Maybe your source of competitive advantage is operational effectiveness. Skilled employees, who find ways to reduce internal costs, can increase operating margins. A strong internal culture – one marked by high employee morale and engagement, can increase productivity, and ultimately, increase profits.
BUILDING YOUR TEAM
You’ve committed to starting your business, but you may not want to do it alone. You may not have the expertise to develop your vision, but you have no capital. Or maybe you already have an equity partner with whom you are working, but need another one or two folks with the right talents to take your idea and make it a reality. However, you do have no prototype or product, or revenue, with which to compensate them.
The good news is that with the proliferation of the digital world, and the growth of multinational distribution channels, has come a world full of would-be entrepreneurs both in the U.S. and abroad. There are undergraduate and graduate degrees in entrepreneurship, start-up networking groups, and even reality shows like Shark Tank, which illustrate actual entrepreneurs obtaining funding and strategic partners. Short of auditioning for a reality show, how do you go about finding like-minded individuals willing to work on your business idea, for only the promise of possible success?
Online networking sites, such as Founder2Be, match entrepreneurs with fledgling enterprises. College campuses are another great place to look. You may consider auditing a class in a particular area to shore up your expertise; why not take advantage of the campuses business networking groups while you are there?
When looking for an equity partner, here are a couple of things to consider:
- Passion and commitment: You are asking this individual to work on a project with no guarantee that it will eventually make enough money to compensate them. They have to believe in the idea, and when the going gets rough, you must find ways to reinforce that belief. (Sounds an awful lot like an HR function).
- Expertise: You need to find someone who can compensate for the areas in which you are lacking. This goes without saying, but be sure that they are actually capable of doing the work through thorough background and reference checks before you assign them a critical task.
OBTAINING BUSINESS SERVICES
You may be a sole proprietor, or even just a fledgling entrepreneur with zero capital, just an idea and insomnia. You may think to yourself, “I cannot afford to take a salary, so how much HR planning can I do?”
To start with, it is unlikely that you have enough time or expertise to fulfill all of the functions of your firm – from marketing to IT to accounting to legal to finance to sales. Some of these functions will have to be obtained from third parties as business services. How do you go about obtaining these services in such a way that advances your overall business strategy? How you approach plugging up your deficits as an individual is a human resources problem and sets the stage for how your firm handles human resources down the line.
- First, review your business strategy. If you are competing on cost than you will automatically rule out low cost providers. If you are looking for ways to differentiate your firm, you may gravitate towards firms that tout their creativity.
- Do your research. In the same way that a corporation’s HR department might employ a firm to conduct background checks, check a vendor’s references – such as their other clients and their profiles on third party watchdog sites like the Better Business Bureau.
- Build long-term relationships with quality vendors. Part of HR is the retention of talented human capital, so it is best to assess the short-term performance of a business vendor’s services, and if they exceed expectations, then retain them through a long-term contract.
Your time is finite and valuable. Chances are you may be burning the candle at both ends trying to produce a certain type and number of products/services, in the early stages. But what happens when a client comes to you with a lucrative order for a related product/service that you don’t have the time, or possibly the expertise, to offer?
One solution is subcontracting the work to a third-party firm. This can be lucrative: by increasing capacity, you may be able to meet increased demand, and/or offer new products/services. But be careful. A subcontractor’s performance or lack thereof reflects on your brand, not theirs. You are ultimately responsible –and liable- for meeting the client’s demand, which makes subcontractor selection a crucial decision.
Some things to consider:
- Do: Develop relationships with multiple subcontractors. Life happens and even the most reliable subcontractor may be unable to meet a deadline for reasons beyond their control. Having a second, and even, third go-to person, can ensure that you meet client expectations.
- Don’t: Automatically select the lowest bidder. While you may be competing on cost, the phrase, “You get what you pay for” often applies in business. An inexpensive firm may not be able to meet your need for reliability and flexibility.
- Do: Your research. Take stock of your existing professional relationships, online freelance sites, such as Elance, and professional networking associations for referrals. But do not stop there. Make sure you check references. Start with small projects and assess the results. There are hundreds of thousands of firms in the U.S. alone that offer B2B services, so if one subcontractor does not work out, there are plenty of others from which to choose.
- Don’t: Over-rely on subcontractors. There will come a time, hopefully early on, when you have enough capital to take on an employee, even if for a part-time position. This should be welcomed, rather than considered as an additional cost. Hiring employees allows you to exercise greater control over your product/service and its production and delivery process. It allows you to develop in-house expertise, and it builds or heightens your nascent organizational culture.
YOUR FIRST (AND SUBSEQUENT) HIRES
Once you have reached a point where you can hire, you may have already made many HR decisions. You may not have thought of them as such, but team-building, obtaining business services, and subcontracting are all HR decisions. A strong employee can increase productivity and profits, while a weak employee can decrease the same, and even potentially harm tarnish your reputation.
When hiring, “[it helps], if I form a relationship with the person prior to the job,” says Brian Murphy, owner of Murphy’s Tavern and Victory Cantina in New York City. “It keeps me competitive because people don’t only work because it’s their job, but they often try harder to ‘help me out’ because of the bond we form. I also tend to [give] the recommendations of other valued staff [great weight when hiring].”
When asking what advice he would provide fledgling entrepreneurs, he offers, this on hiring: “I would say use your best judgment. Get someone based on personality and their ability to work, not on their past work experience. Just because someone has been doing something for a while does not mean that they haven’t developed bad habits or are good at what they do. Get someone who is willing to learn what you want to teach them.”
All important points. Others to consider include:
- Ensure that your hires are aligned with your business strategy and tactics. Do not just hire because you can. Make sure that each new employee is hired to accomplish some aspect of your firm’s strategic plan.
- Formalize HR planning. Even if you have given it short shrift until this point, your first hire necessitates the beginning of long-term HR planning.
- Finally, pay particular attention to the culture of your firm. A combination of freelancers, equity partners, part-or full-time employees, and business service vendors, all combine to create something very unique. If not properly cultivated, it can have a negative impact on your entire operation. However, if nurtured, it can lead to a lasting and sustained advantage for your firm.
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