The Agency/Transactions Cost Perspective and HR Strategy

Agency theory attempts to solve two problems (the agency problem and the problem of risk sharing), which arise when the goals of the principal (employer) and the agent (employee) conflict; it is then difficult or expensive for the employer to verify what the employee is actually doing, and the employer and the employee prefer different actions because of different risk preferences.45 The agency problem thus exists when one party requires services from another under conditions of uncertainty and when both parties behave out of self-interest. Transaction costs are the costs associated with negotiating, monitoring, evaluating, and enforcing exchanges between parties, and are incurred in order to make exchanges more efficient.26 There are at least two ways of decreasing agency problems and reducing transaction costs. One is outcome-based contracts, and the other involves monitoring to verify behavior.

The agency/transactions cost perspective seeks to explain control in organizations; thus it may be observed by a TMT whose assumptions regarding human behavior can be characterized by terms such as self-interest, bounded rationality, and risk aversion.27 A TMT that believes that the sustainability of their company is internally driven, and competitiveness is based on internal structures that efficiently manage the idiosyncratic goals of employees might therefore adopt this perspective. The description of an HR strategy based on this perspective might thus be along the lines of:

We facilitate task conditions that allow employees to demonstrate their unique contributions, and to benefit from those contributions. The role of HR is thus to measure unique contributions and to provide adequate rewards for individual employee performance. We view the aggregate performance of our company as contingent upon the control systems used to monitor employee behavior.

We refer to this strategy as a "bureaucratic" HR strategy.

The Industrial Organization Economics Perspective and HR Strategy

From an IO economics perspective, a company's success is dependent on its industry.28 One paradigm from this perspective argues that industry structure determines the behavior and actions of firms. It is the joint conduct of firms that determines their collective performance in the marketplace. The early literature on strategy identified three essential conditions for a firm's success.29 First, a company must develop and implement an internally consistent set of goals and functional policies that collectively define its position in the market.30 Second, goals and policies must fit the firm's strengths and weaknesses relative to external (industry) opportunities and threats. Third, a firm must focus on its distinctive competitiveness.

Although the perspective views firm performance as contingent on the industry as a whole, performance differences within the industry exist due to differences in management quality. In other words, competitiveness is a function of the extent to which internal (organizational) structures (e.g., goals and policies) efficiently reinforce the firm's strengths given industry opportunities. An HR strategy consistent with this perspective might thus read:

We consistently explore market opportunities within our industry, while aligning our human resources capabilities with this opportunity.

We refer to this as an "external fit" HR strategy.

Strategic Group Process Perspective and HR Strategy

Proponents of the IO economics perspective believed that industries contained homogenous firms whose overall success was driven by the industry, but whose individual success depended on the management of the firm.31 Company success was viewed as being based on largely implicit assumptions about the nature of firms and the environment in which they operated. The distinction between the IO economics perspective and the strategic group process perspective is that although both see the industry as being a major determinant of firm success, the latter stresses the dynamic interactions among firms more than the former. Whereas the IO economics perspective views competitors as being homogeneous and the industry as bring static, the strategic group process perspective views a firm's strategic choices as being critical to firm performance; thus there are many alternative ways for a firm to gain a competitive advantage.

Due to its emphasis on change, this perspective might be appealing to a TMT that believes that the sustainability of their company is externally driven but that competitiveness is likely to increase when the internal (organizational) structures (e.g., goals and policies) are flexible enough to adjust to change within the industry. External (industrial) structures are also perceived to be subject to change, for example, through strategic choices such as mergers and acquisitions within the industry. A corresponding HR strategy might thus be characterized by:

We actively search for opportunities within the industry through strategic alliances with others, or through mergers and acquisitions. We pursue flexible, quality human resources to respond quickly to the changing strategic choices of competitors and ourselves.

We refer to this as an "alliance" HR strategy.

Dynamic Capabilities Perspective and HR Strategy

The dynamic capabilities perspective is an extension of the resource-based view of the firm.32 It considers issues of firm strategy that are modeled specifically on dynamics and high-velocity environments. The perspective views firm performance as being largely contingent on internal (organizational) capabilities. Due to the critical emphasis on the internal (organizational) processes of a firm, this perspective may resonate with a TMT that believes that the competitiveness and sustainability of their company is likely to increase when the internal (organizational) processes are efficient given fluctuating external environments. It may also appeal to a TMT that believes that the industry is unstable and thus company performance may be vulnerable depending on how it responds to this instability. A possible HR strategy might thus be characterized by:

We always pursue the flexibility of our organizational processes so that our company can adapt to the ever changing environment. We therefore empower employees and nurture creativity and diversity so that employees can respond effectively to unexpected conditions that they have never encountered.

This strategy is referred to as a "flexibility" strategy.

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