The Importance of Human Capital in Organizational Performance

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Statement of purpose

The purpose of this article is to highlight the importance of human capital in organizational performance. Human capital is the capabilities of the individuals within a firm in addition to their knowledge skills and experience. These attributes are relevant in addressing the competencies required for a proper running of a firm. The article asserts that human capital, being broader than human resources, addresses a wider knowledge than human resources. According to the article, Human Resource Management looks at the individual knowledge whereas human capital goes beyond the individual to encompass shared and institutionalized knowledge which is used as a common tool that drives the organizational routines and processes (Peck, 1987).

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Other resources in firms are substitutable but nothing can replace the human being. There is nothing that can replace human capital and its knowledge, skills, learning, capabilities, creativity, ingenuity, and innovation. The aforementioned attributes are not constant and they need to be thoroughly reviewed to ensure they are up to date with the firm’s dynamic needs. This means that the accumulation of exceptional talent is not enough for a firm. This is a human resource (Runnel, 2003).

However, the human resource becomes human capital when the resource is willing to invest its expertise, skills, and knowledge in improving the position of the organization. In other words, the human resources of a company cannot be referred to as human capital if they do not commit to engaging with the organization because if this commitment is not there, then they cannot be considered as a viable investment by a company. A resource can be there in the firm, but lying there dormant, without bringing any good to the company but it becomes capital when it becomes an active part of the processes and the routines of a company.

Summary of the Journal article

The journal article starts by outlining the necessary complementary capitals that drive human capital to effectively help in realization of the strategic objectives of a company. The complementary capitals include the social capital and the organizational capital and when the two are added to human capital, they create a concept commonly known as intellectual capital. When the organizational, human and social capitals are combined to bring economic value to a company, they form what is called the intellectual capital.

The knowledge within the human capital and the ability of a social collectivity in an organization creates an intellectual community that can practice professionally. This means that intellectual capital is a very broad category whose key dimension is the human capital (Robins, 2005).The development of the human capital requires the input of the rest of the two capitals for any competitive edge to be achieved. The social, human and organizational capital must be therefore integrated in the processes of a firm. Before looking at the integration of the three forms of capital it is imperative to understand what social and organizational capitals are.

The article asserts that Social capital focuses on social networks. Social affairs require relationship networks which are very valuable resources for a firm. This means that social capital is a factor that works to increase the effectiveness of action creating a cooperative organizational behavior. This implies that the formation of social relationships helps the social capital to develop the human capital which in a bigger sense develops the intellectual capital. The human resource management practices in a firm must therefore have ways of tapping individuals who have better social capital. It should tap those individuals with stronger networks because they will help the company to attain an edge in the competitive market.

Social capital is extremely important at the organizational level (Sherwin, 1988). It enhances the development of social capital by influencing the underlying conditions that are needed for networking to occur. For social capital to be effective in creating these networks there must be a structural perspective that has ties, configurations and organizations of networks.

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There must be a cognitive view point which encompasses the shared codes. The communicative processes and a relational perspective which encompasses the values, norms and the trusts within an organization, all the above perspectives of the social capital influence the development of the intellectual capital. This approach to social capital is in tandem with the resource based view of a firm that lays emphasis on the combination of diverse resources with a lot of weight being put on the individual relations. This creates a background of connections that cannot be easily imitated. They are durable, rare and very tacit.

According to Gratton and Ghoshal, social capital works on the two doctrines of trust and sociability. It’s the deeper wealth of the doctrines and the possible points of leveraging that builds significant reservoirs of knowledge and more chances for the creation of value and arbitrage (Seymour,2003). The other element in the intellectual capital is organizational capital whose work is to connect the organizational resources with each other to form a process that creates value for the consumers of the products of a firm which in the long run creates a sustainable competitive advantage, enhancing the revenue base of the firm.

Organizational capital is therefore made up of the leadership, cultures, values, performance, controls, information flow, decision making, allocation of resources, acquisition of resources and the reporting structures. The interplay between the aforementioned factors is vital for the human capital in a firm because they enhance motivation that enables the workforce to use their expertise to promote and enhance the position of a firm in the market. The most important element of the organizational capital on the development of human capital is the organizational culture because it impacts on the HR processes of recruitment, selection and retention. It also determines the levels of commitment in the system. Stronger values of culture in an organization are incentives that motivate the employees to remain committed and to identify themselves with the firm. The most important element of an organizational capital is a supportive culture that has a powerful corporate purpose because this one creates a compelling value that provides a strong framework for organizational excellence.

For a firm to get an advantage in the market from its human capital, it must develop positive systems of performance appraisals that are incentive based and create a competitive reward system that motivates the employees (Irvin, 2004). Skilled workers need to be motivated because they known to be the best performers when motivated. They stop being mere resources and become a real business capital that definitely gives a firm a stronger position in the market. The other principle of organizational capital that is crucial to the development of human capital is the process and the routines of a firm because these are the ones that act as adhesives in the organizations. They can enhance or debilitate the development of knowledge and the cooperation of workers in the organization. This means that the structures in an organization should be able to support the purpose of the organization in order to create variety in operation without creating schism between groups and individuals. When the human capital, organization capital and social capital are connected, the y bring forth the intellectual capital and this will in actual fact influence the way knowledge is managed in a firm.

Strengths and weaknesses of the article

This article has one major strength. It uses an economic perspective to analyze the impact of organizational behavior on business performance. The use of economic theory gives this article a lot of weight. Economists have considered knowledge to the most valuable resource especially in the modern knowledge based economy. The generations, integration, transfer and leverage of knowledge has received widespread interest from economists who have conceptualized knowledge as a key indicator of performance of the human capital.

Critique of the article

This article, however fails to capture the management styles that can be used to manage human capital and its knowledge so as to create an organizational behavior and culture that can support the strategic efforts of an organization. Human capital poses two levels of knowledge (Forsyth, 2006). The tacit knowledge that is characterized by the knowing how to do things or know how and the explicit knowledge that can be coded. The source of the knowledge in a firm is the human capital and if the knowledge is the most important asset in a firm, then the possessors of knowledge, the human capital must be well managed.

For proper management of the human capital that generates knowledge for a firm, there must be a leadership that will be able to identify the knowledge, promote creation of more knowledge, protect the knowledge and facilitate its transfer. Tacit knowledge possessed by the human capital is not like that explicit knowledge because it is intangible (Estelle, 2000). Thus the major component of human capital management should be creating an environment where this intangible knowledge can be seen working to lift the position of a firm in the market. This means that the tacit knowledge should be forever in motion, working and being enhanced. This calls for the provision of training and provision of incentives where this knowledge can be applied(Fahey, 2002).

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The purpose of the human capital management should be making the available knowledge easily accessible and easily transferable. For a company to attain competitive advantage, the knowledge that is there within it must be codified through creativity and innovation. According to Leonard Barton, there are process that can be followed to support organizational learning and innovation. These include ownership of the existing problems and the setting of strategies to solve them, integrating the intrinsic knowledge, continuous experimentation and the integration of the extrinsic knowledge(Keeley, 2007). If there is adequate social capital within a firm, then the mechanisms of creating and transferring knowledge can be easily instituted. Efforts that can turn knowledge into actions can be inhibited by organizational routines that create boundaries.

Statement of purpose

This book focuses on different concepts of organizational behavior and how they can be applied to enhance organizational performance. The main area that has been tackled in the book is the psychological principle of group dynamics and its importance in organizational management. The book starts by making a difference between a group and a crowd. The difference between a group and a crowd is that a crowd is just an assembly of people with no mutual understanding or shared objectives. Members of a crowd may not know each other and there is a lower level of social interaction and psychological influence in a crowd (Robins, 1998).

However, there are mutual objectives and feelings of togetherness in a group and members influence each other socially and psychologically. When the members of a group are willing to work together following a common goal, they create a team. This means that a team is a grouping of higher social and psychological organization.

Summary of the book

According to the author There is tremendous energy that flows in a team which may have positive and negative impacts (Sun, 2008). The understanding of the group dynamics by the manager of organizations is very important for the shaping of the organizational behavior and culture. Organizations have people from diverse backgrounds and different personalities brought together to form a group which is supposed to work as a team.

These diversities in background and personality can create social and psychological problems if they are not well managed. It is only through the application of the principles of group dynamics can these problems that arise in a group can be solved.

The author maintains that a manager who understands the principles of group dynamics can apply these principles to develop effective working groups, efficient committee administration, participation and skill development. The understanding of the sociological and the psychological foundations of a group can help managers to transform groups in the workplace into winning teams through effective orchestration and coordination with the creation of the psychological support. In order to succeed in this, there must be an understanding of the sociological and the psychological shape of a group that has been transformed into a team.

To start with, there is the perception of a mutual stakes in both the successes and the failures of the unit. Secondly there is a display of higher levels of motivation, imbued with energy and enthusiasm, both physical and mental that leads to an inspiration to achieve. Moreover, there are higher levels of innovativeness and originality which lead to evolution of practical ideas than enhance the survival of the organization in the competitive market. There is an exertion of control, and clarity in the comprehension of relations and roles.

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For the groups to be able to deliver the organizational success that many companies yearn for there must be a conducive psychological and social environment necessary for the working of a group. This environment can be partly provided by the leadership of the organization. The leadership should encourage relaxed interpersonal relations complete with a give and take spirit, openness authenticity guidance and mutual help. Criticism and suggestions in the workplace should be constructive and aimed at the improvement of one another.

Offensive criticism and suggestion can have psychological damages that may derail the performance of the team. The leaders should display the behaviors the want to see in the groups they are supervising. The principles of group dynamics indicate that the leaders usually wield psychological influence in the group and any negative behavior by the leader may have a negative psychological impact on the group members in a way that may affect the effectiveness of such a group. The communicative processes and a relational perspective which encompasses the values, norms and the trusts within an organization, all the above perspectives of the social capital influence the development of the intellectual capital. This approach to social capital is in tandem with the resource based view of a firm that lays emphasis on the combination of diverse resources with a lot of weight being put on the individual relations. This creates a background of connections that cannot be easily imitated. They are durable, rare and very tacit

The other way in which supervisors can enhance the psychological well being of the members of the groups they are in charge is by the way they give feedback.The author asserts that direct feedback to the group has a lot of psychological impetus that feedback that is supplied through chains. Direct quality control serves as a group; motivator because the privacy of the individuals is respected and the human touch in the feedback coming from the supervisor also boosts the confidence and the self esteem of the employees.

Participative leadership is another attribute that improves the efficiency of groups in the workplace. Leaders who maintain tight controls and remain detached from the groups they head reduce the enthusiasm of the group members and the ensuing lack of motivation can have an adverse effect on group performance. However, a participative leader is always in touch with the operations of the groups and helps in maintaining order. The presence of the leader on the ground creates a psychological impetus resulting in a group imbued with enthusiasm and higher levels of motivation. This in the long run affects the productivity of the whole organization positively. This kind of a leader does not create unhealthy competition by making comparisons within the group; they assume the entire responsibility and avoids belittling individuals in a way that will affect their psychological wellbeing. Constructive correction instead of rough reprimands creates a conducive environment for improvement by members of groups that may not be performing to the optimum. This kind of correction is psychologically superior because it leads to the development of a positive self concept which increases the confidence and the personal gusto (Irvin, 2005).

It also reduces workplace rivalry because in a situation where the leader results to harshly reprimanding members of a certain group, they may develop negative attitudes to those groups that seem to be enjoying the leniency of the leaders. This is one of the causes of workplace conflict which can be mitigated through psychological leadership that employs the principles of group dynamics to create logical problem solving approaches that may not be injurious to the organizational performance.

Social stratifications may also have psychological impacts in the workplace especially where groups are concerned. Social strata like religion, economic class, race and even tribe can lead to formation of power groups within the workplace and this can engender divisive sentiments that can cause conflict within a group or between different groups. This means that a leader who takes advantage of the strata to create divide and rule scenario will bring psychological ruin to the organization because politics will take center stage and this is a good recipe for tension, suspicion and rivalry that may hamper organizational performance.

Instead of using diversities to engender divisive ends, leaders should take advantage of these diversities and foster virtues of respect of different cultures, beliefs and norms. This appreciation of the cultural diversities will foster understanding, cooperation and togetherness in the workplace groups. The result is that a relaxed atmosphere will be built in a way that promotes the psychological well being of the group members enabling them to perform at the highest potential. Rewarding of excellence is another attribute that can promote the psychological set up of a workplace. Rewarding means that excellence ahs been noticed and appreciated and this is one of the best extrinsic motivators. It is psychologically beneficial for groups when excellence is rewarded within the group context rather than singling out individuals within the groups.

The other factor that can psychologically enhance group performance is the existence of freedom of expression (Uwe, 1998). Team spirit, motivation and commitment can only develop when group members are given the chance to freely express their feelings, ideas and opinions. This encourages amicable resolution of conflicts and easy building of consensus in a group in the workplace. Suppression of opinion and feelings by tightening control leads to emotional build ups whose psychological consequences may be prejudice, hostility, tension, anxiety and suspicion. The aforementioned attributes are recipes to workplace conflict and they also lower the levels of staff motivation because the members of the group spend most of their time building these negative attribute instead of focusing on their tasks and roles.

Conclusions made from the reading

The understanding of group dynamics and its principles can help the management in the workplace to develop and manage productive groups where members use the best of their capabilities to supplement the efforts of each other. Managers in organizations should therefore apply the principles of group dynamics to build maintain and manage proper working conditions that do not affect the psychological wellbeing of the employees. The application of these principles together with transformational leadership will undoubtedly have a significant positive impact on the productivity of workplace groups, the morale of the workers motivation and industrial relations.

Strengths of the book

The strengths of this book lie in its emphasis on the importance of investment on the development and the promotion of human capital and they have given enough evidence why the companies and firms should continually invest in human capital. Before this investment can be made, there needs to be a framework set for the management of the human capital. A company may be able to attract the best human capital in the land and yet fail to perform due to lack of leadership and management styles that will ensure that the human capital is utilized effectively.

Weaknesses of the book

The book, however does not address the management and leadership that should exist to ensure that the human capital that the company or a firm has invested in is able to perform and give the firm a competitive advantage. There should be an analysis of management styles and the identification of the styles that are going to ensure effective performance of the human capital in the firm. Management styles are very important in a firm because they determine the success of human capital. Management styles include how people form relationships in the workplace how the staff is motivated, decision making and problem solving.


The most important thing is to have the management style and the culture of the company matching and this means that the human capital will find a conducive environment that will help them to operate efficiently. This will help them to raise the position of the firm in the market. However, if the two are radically different, there can be a struggle which can easily hurt the operations of a company (Dawson, 1998).

When our management style matches the company’s culture the human capital gets the impetus to perform, however, when it is radically different, life can be a constant struggle which may hamper the strategic direction of a company. The most effective management style that ensures that the human capital investment by the firm produces maximum results is the people oriented management style. In this management style, the human capital is actively involved in the decision making process.

The management makes sure that it consults the workers before making vital decisions and the workers feel that they are an integral part of the company because they are close to the internal operations of the company. To attain a collective culture in a company or an organization, the manager must have solid familiarity with the employees and the tasks they are given. This means that the managers must come down to the people and understand how they operate, the problems that they are facing and try to provide solutions. The management should not sit somewhere in an ivory tower, detached from the day to day activities of the company (Senge, 1990).

They should be down with the people, trying to seek ways of guiding the company to new heights by acting as a good role model and an inspiration to the juniors. Like Mahatma Gandhi said, the employees should not just hear what they are expected to do, they should also see it and this means that the managers must become the change they want to see. Therefore the management must work together with the human capital that it manages and this will improve the outcomes of the firm in a way that will justify the investments in human capital.

The other thing that must exist to create a conducive environment for the successful performance of a firm’s human capital is communication (Smallbone, 1995). Communication is a vital element of a collective culture in an organization. The model of management determines how information flows in an organization and how the workers relate with each other, to attain a collective culture in an organization, communication lines from the top to bottom and vice versa should remain clear meaning that there should be no barriers to effective corporate communication. In a collective culture, there should be an open door policy where even the most junior employee can have a chance to voice out his or her concerns top the top level of management without being impeded by the unnecessary bureaucracy and the hierarchical structures. Keeping the communication lines open ensures that there is harmony in the workplace and the team can remain united, working as a one unit and not as different elements (Zairi, 1998).

Good communication is nurtured by a good management styles. It eliminates confusion, ensures that the tasks are understood, problems are identified and solved immediately and a sense of responsibility is developed in the workers. One of the best management and leadership styles that can nurture a collective culture is team leadership which is a high task and high relationship approach of management (Sun, 1998). These are the kind of managers who strive to encourage their workers and ensure that the workers work as a team by strengthening the bonds among the various members of the team. The team therefore works collectively (Wiseman, 1994).

This is the leadership style that produces the most productive and the most harmonious working environment. The returns on the investment in the human capital of a firm can be guaranteed if there is a transformational leadership in the firm. Transformational leadership is a leadership and management style where the managers and their juniors are involved in a process of engagement whose objective is to mutually raise each other extra heights of motivation and morality (Bradford, 2000). In the process, they model the values themselves and apply their charisma to make themselves attractive to the people through the values inherent in them (Uwe, 1998).

This type of leadership is the most selfless form of leadership and avoids appeals that are usually geared towards selfish concerns (Bass, 1990).

In contrast to the traditional leadership approaches, this method is not a form of sporadic and discrete exchanges; it is a continuous process that grows as the relationship between the leader and the followers becomes strong (Bradley, 2000). The transformation leadership style operates on the premises that people will always follow an inspiring person who has a great vision and has the capability of achieving great things (Burns, 1998). For a leader to achieve the aforementioned attributes, they must therefore have a higher moral position to be able to motivate the people who are following them (Sewell, 2009).

The selfless nature of the leader will also be copied by the people who will therefore aim at serving others, working together collaboratively thus avoiding destructive and selfish individualism that does not have the power to transform the society. A transformational leader is also a motivational leader who uses social and spiritual values instead of force to become powerful (Levitt, 2004). Becoming powerful for transformational leader occurs by default because the transformational approach gives the followers a sense of connection with a higher moral authority that has purpose thus promoting their sense of meaning and their social identity.

Transformational leaders care about their workers and are not threatened by their success which means that they focus on the success of their workers which they know will translate into the success of the whole organization (Seymour, 2003). The initial phase of transformational leadership is the development of a vision. The vision may come from the leader himself, form junior or senior teams or from some brainstorming sessions within the organization (Seddon, 1998). The important aspect in the development of the vision is the leader’s attitude and line of action because that is the one that is bound to convert followers to buy it, hook, line and sinker.

The development of the vision may be a small phase but one phase that is rigorous and continuous is that of selling the vision. There must be a lot of energy and commitment that is put into the process of selling the vision because people may immediately buy the vision while others will show slower response than the rest. This means that the transformational leader will utilize every other opportunity relentlessly to persuade and convince the others to be part of the bandwagon.

In this process, the transformational leader strives to earn the trust of those under him which leads to the development of personal integrity that is a critical part of the package that is being sold as a vision. Earning the trust helps the leader and those under him to sell not only the vision, but themselves also (Levitt, 2004).

Transformational leadership generates success mainly because the followers have an inspirational figure to guide and motivate them and they grow in confidence knowing that even in the event of failure, they are still certain that the failure will lead into their personal growth instead of retribution (Bowles, 1975). This means that the followers are always free to innovate and venture into the unknown for the benefit of the organization rather than remaining confined to the known for the sake of safeguarding their jobs.

Transformational leadership has been successful in the organizational and even the national level with the African country of Malawi being the best example ever of a nation that has prospered under the transformational leadership of President Mbingu wa Mutharika. Malawi used to lead in the global cases of malnutrition but in less than five years, it has been transformed into an African food basket.

The transformational leadership theory can be easily be implemented in organizations to promote the collective culture which is necessary for the human capital to function efficiently. It can start with simple activities like listening to the followers, doing constant rounds to carry out supervisions that are meant not to disparage but to build the followers and to make them confident in their work. In the workplace, the transformational leader will constantly infect and re-infect the workers with a level of commitment that ensures that the belief in success is nurtured even in the most questionable circumstances (Becker, 1993).

The leader can use ceremonies to sustain the motivation of the workers where small leaps forward are noticed and indicated as real progress thus pumping up the enthusiasm of the workers. Such leaders often balance action and attention to create progress in their followers and also ensure that their mental state is kept in a manner that reflects success by ensuring that their immediate needs are satisfied and their fears are removed. The leader is always people oriented their sustained commitment to the human and material resource helps in the transformation.

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