Michael Porter’s message to a HR Director -The importance of differentiation

Union of Professional Engineers in Finland published recently a survey according to which 75 percent of employers struggle to find suitable, skilled people to their vacancies. Even if the survey was conducted at a time when economic activity was stronger, competition for skilled and competent employees is ongoing. Too often a lack of suitable candidate is hindering business growth. It is important to remember that there indeed are skilled people out there, the problem is how to get them to choose your company over other options.

Where to find a solution to the problem? What could your organization do in this situation? One key solution is differentiation.

Michael Porter introduced in the 1980s three generic strategies for competitive advantage. These were cost-leadership, differentiation and focus strategies. According to the theory, when a company differentiates itself, it chooses a set of attributes that differentiate its product or service from the competitors’ in a way that a customer values. The key to success becomes from offering a product or service that is better than its competitors’ at least by one attribute. The opposite of differentiation is being stuck in the middle.

“Stuck in the middle” happens when a product or service fails to differentiate itself from its competitors and thus, does not do well in the market. There is always a product or service that is somehow better in the eyes of a customer. According to Porter, this kind of product or service is very vulnerable when the competition increases. Customers don’t choose a product or service that is mediocre in every category, but they choose an alternative that is extra appealing in some of the dimensions that is most important to them. Even if this theory is over 30 years old, it is still one of the foundations of organizations’ strategic decision-making, especially, in the fields of R&D, sales and marketing.

How is this theory visible in HR departments? Analogy is: Your organization sells a product called employment contract and your clients are potential and current employees. That product encompasses an endless number of different attributes such as compensation, benefits, career and development opportunities, location of the workplace, organization’s vision, mission and practices, products and services, culture, managers and co-workers. There is an endless amount of possibilities for differentiation. Many of these attributes are outside of HR’s direct responsibilities, thus affecting them can be slow. On the other hand, many of these attributes are in fact HR’s direct responsibilities and there is a great chance for HR to have an impact. These separate attributes can be called HRM practices. If these practices are similar to your competitors’ how does differentiation occur? According to the theory, it doesn’t. Everyone has similar processes and practices. In this case, how can you develop differentiation?

If your organization is stuck in the middle, what can you do? How to build differentiating HRM practices? I recommend your organization to take these three actions:

  1. Firstly, it is important to stop and reserve time. Too often positive differentiation is vaguely thought through because there was not enough time or need for deep reflection. Successful differentiation does not usually happen by accident, but it requires profound thinking and deep conversations. External facilitation can be helpful. One needs to be able to stop. One has to question current HRM practices and the assumptions beneath them. In addition, one has to dream. These elements lead to creativity that is needed in building differentiating human resources practices.
  2. Secondly, it is important to understand that a successful differentiation needs up-to-date market understanding. How well do you know what your potential employees need? What are the HRM practices that young employees value the most? What are the new practices that have helped your competitors differentiate? Gallupi published in 2016 a report ´How Millennials Want to Work and Live.´ The main message is that the needs of new generation differ significantly from older generations’ needs. Do your HRM practices represent more future or past? In a dynamic competition there is not a single organization that has access to all information, but everyone has or can access understanding to support good decision-making. The key question is who can utilize effectively and rapidly the information one has access to.
  3. Thirdly, it is essential to emphasize the importance of trial and error. Building differentiation is determined but most often a nonlinear process. Differentiating HRM processes are rarely created only by planning but to determinedly testing. All practices do not need to be unique, but a good goal could be that every organization would always have one creative and differentiating HRM practice on trial.

 

As a conclusion, I want to encourage every organization to stop and gather around this question: How do I build differentiation with HRM practices? You might think that the topic is not relevant right now because finding good, skilled people is not a challenge. However, I want to remind you that after economically difficult times there will always be a boom and consequently, there is quickly a lack of competent employees. I recommend you spend this time by building a foundation for those HRM practices that positively differentiate you when the competition increases.  This way you will have an advantage over the 75 percent who are struggling to find suitable, skilled people to their vacancies.

 

Markus Taina

 

The CEO of HR Plus Oy