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HRM, Firm Performance and the Value of Psychology

March 20, 2014


Human Resource Management (HRM) is often cited as a strategic function, but many organizational decisions do not reflect this sentiment; Human Resources and the HR department are often thought to be of relatively low importance. During a recession, the first cost-cut that most organizations undertake is reducing manpower.

HR is there to enhance the human capital and, by extension, to add value to an organization. One of these objectives is developing and sustaining competitive advantages. The modern HR executive is crucial in developing and maintaining competitive advantages derived from human capital resources, including: the knowledge, skills, abilities, commitment, competencies and intelligence of employees. Management psychology plays a key role in this area.

Psychology & Performance

In the area of human capital, psychology performs a crucial value-added role to the HR functioning of a firm. Human resource management is intrinsically entwined with management psychology. HR managers and executives can impact the financial performance of a firm through their effectiveness in traditional HRM roles, given the four basic problems most HR focuses on: motivation, leadership, interpersonal relations and personnel selection.

Firms generate value through decreasing product/service costs or competitively differentiating their product/service to enable charging a premium. As such, the ultimate goal of HR executives is to create value through their human resource function, and their role in developing and sustaining positive dimensions of organizational culture through their HR practices.

A case in point is General Motors (GM) and Ford. Both historically recruited factory workers from the same basic labour market. There is little evidence suggesting skill levels of Ford’s workers are significantly higher than GM’s. However, Ford was more successful at developing a cooperative, team-based culture than GM. Both organizations set out to develop employee involvement programs through the late 1970’s to early 1980’s.

Ford successfully changed culture and HR systems to enable and value employee participation in decision making to a greater degree than GM. Ford’s culture and HR systems enabled employees to participate in decision-making and utilize cognitive skills that GM systems have been less able to exploit. In addition, as Ford hires better qualified employees through an extensive assessmentprocess, the participative system grants it a competitive advantage over GM.

The Selection Process

Selection is another area where psychology can make a crucial impact. Selection deals with identifying, attracting and choosing suitable people to meet organizational HR needs, that include: finding, assessing and engaging new employees or promoting existing staff.

The focus is matching the capabilities and interests of prospects with job requirements and challenges. Selection decisions are critical managerial decisions, because they are a prerequisite to developing an effective workforce. Selecting suitable employees is important for three reasons:

  1. Firm performance depends on staff performance.
  2. Costly to recruit, hire and acclimate employees.
  3. Legal implications of incompetent hiring

A further example was, Nordstrom. A US retailer, it operates in the highly competitive retailing industry. Retail is characterized as having relatively low skill requirements and high turnover for sales clerks in most countries. Nordstrom attempted to focus on individual salespersons as keys to competitive advantage.

They invested in attracting and retaining young, college-educated sales clerks who desired careers in retailing. They provided highly incentive-based compensation that allowed Nordstrom salespersons to earn as much as twice the industry’s salary average. Nordstrom culture encouraged sales clerks to make heroic efforts in attending to customer needs, to the point of changing flat tires in the parking lot.

The recruiting process, compensation practices and culture at Nordstrom helped theorganization maintain the highest sales relative to floor area of any retailer in the nation through the 1990’s, prior to the emergence of Amazon and other e-commerce platforms.

To leverage on HR’s role as a strategic partner, businesses have to increasingly meld HR practices with psychological insights in both management and general labour. In tight labour markets, the ability to recruit and retain talent is a critical part of what sustains and maintains a firm’s competitiveness.

Sources & Further Reading

Barney, J. B., & Wright, P. M. (1997). On becoming a strategic partner: The role of human resources in gaining competitive advantage. Retrieved from

Huselid, M. A., Jackson, S. E., & Schuler, R. S. (1997). Technical and strategic human resources management effectiveness as determinants of firm performance. Academy of Management journal, 40(1), 171-188. .Retrieved from

Rasim, T. S. (2008). The Role of Psychology in Human Resources Management.Europe’s Journal of Psychology, 4(4). Retrieved from


Article Contributed by HR in Asia‘s Team.

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