How Control in Human-Asset-Intensive Firms Differs

From Physical-Asset-Intensive Firms: A Multi-Level Approach When implementing flexible manufacturing technologies, U.S. firms often purchase the physical equipment but not the expertise. In contrast, Japanese firms primarily value the expertise. Jaikumar reports the result: "They are buying the hardware of flexible automation -- but they are using it very poorly. . . . With few exceptions, the flexible manufacturing systems installed in the United States show an astonishing lack of flexibility" (1986: 69). The difference in approach is whether the primary asset is considered to be the physical equipment or the people who understand the technology. The notion that human assets have critical implications for organizations is neither new or controversial (Alchian and Demsetz, 1972; Cascio, 1987; Chandler, 1962; Mitchell, 1989; Williamson, 1975). They may be the source of a sustainable competitive advantage and, arguably, the most important assets (Reed and DeFillippi, 1990). Nevertheless, most research has not differentiated between firms which rely heavily on them (human-asset-intensive or "HAI") and those that do not. This is critical because, put simply, the firm's assets walk out the door each day, leaving some uncertainty about whether they will return. Human assets differ from physical assets in two critical ways: 1) the tenuous organizational property rights, and 2) the uncertainty and asymmetric information about productivity and value (Alchian and Demsetz, 1972; Chiang and Chiang, 1990; Flamholtz, 1985; Mitchell, 1989; Steffy and Maurer, 1988). These attributes, in turn, have implications for organizational structures and processes that determine how firms coordinate activities. This article explores the implications of human assets for organizational control. Theorists have long argued that as uncertainty increases, organizations move from dosed bureaucratic systems to open flexible systems (Thompson, 1967; Merchant, 1982; Snell, 1992). Human assets are a key source of uncertainty and thus a major determinant of organizational form. I begin by defining human assets in the context of organizational theory. This is followed by a multi-level model of control that I use to compare human-asset-intensive firms with those that emphasize physical assets. I close with a discussion of implications for managers and future research. What Are Human Assets? Borrowing from the accounting definition of an asset, human assets reflect human capital under organizational control which, when deployed, has the potential to generate economic rents. [1] We might distinguish HAI firms as those that rely more heavily on human assets than physical assets (e.g., a ratio). This might range from knowledge- or technology-intensive manufacturing processes to professional service firms. [2] It would not include firms that rely primarily on unskilled labor or strictly capital intensive enterprises. This definition highlights how human assets relate to organizational outcomes as opposed to the human capital literature which focuses on labor market or individual outcomes (Becker, 1983; Mincer, 1974; Welch, 1975). This organization-focus highlights two attributes that are very important themes in organizational theory: 1) the role of organizational control, and 2) the asymmetric information and uncertainty about current productivity and future value. First, human assets are under organizational control, a topic that tugs at the very roots of organizational theory (Barnard, 1968; Simon 1976). This represents a significant contrast from tangible assets which are often subject to full ownership. Of course, ownership is but one point on a continuum of control. Even owners must face restrictions on asset utilization from regulation and contractual obligations. The tenuous organizational property rights associated with human assets are at the root of many interesting problems in organizational theory. …