european journal of social sciences issn: 1450-2267 - EuroJournals

European Journal of Social Sciences – Volume 5, Number 3 (2007)
From a textbook perspective, competitive markets are relatively uncomplicated and easily
understood; no uncertainty with complete information, complete resource mobility, products or
services which are homogenous among rival firms, and a large number of buyers or sellers in the
market so each firm is a price-taker. This view assumes, of course, zero transaction costs, i.e., the costs
of discovering, contracting, monitoring and enforcing market exchanges. With this assumption, the
determination of demand collapses into a relatively easy calculation. However, as Leibenstein pointed
out:
“Microeconomics is not concerned with the internal workings of the organization. The
problem of internal efficiency is assumed away by postulating the existence of a
production function, combined with the maximization postulate. Once we imagine that
the firm knows the relationship between inputs and outputs, we can magically get the best
results, then nothing more need be said. Although such a simplification of reality is useful
for some types of theory construction, at present, it seems desirable to try to develop
theories on a more realistic basis.” (1987, p.3)
When we enter the actual world of economic transactions and competitive markets,
environmental forces such as degrees of uncertainty, instability, complexity, information asymmetries,
and positive transaction costs prevail, therefore nothing must be taken for granted or simply assumed
away. Strategic positioning, product differentiation, and organizational culture do play a critical role in
the attainment of a competitive advantage in the market. The unique, difficult to imitate, internal
resource configuration of a firm provides it with an edge in the competitive market (Barney, Wright &
Ketchen, 2001). This implies that the strategic development and employment of a firm’s human
resources are key to acquiring a competitive advantage. These ideas have helped shape new visions for
the function of a firm’s human resource department.
The Basic Linkage of Derived Demand and Human Resource Planning Process
Although commonly cited throughout most labor economics texts, “the demand for labor is derived
from the demand in the product/service market” is the mantra which often masks the complexities of
this relationship and is one that must be fully understood for effective competition.
At its most elementary level, the derived demand principle states that a firm’s demand for
human resources is derived from the firm’s product or service market. This proposition provides a
pathway that links a firm’s resource market with it product/service market. The basic implication of
this principle is that the firm’s human resource planning process is simply an algebraic count: given a
forecast of product demand, the quantity of labor services is simply calculated from the umber of units
sold or forecast to be sold. Since most organizations can generalize the headcount required per unit
volume production, the personnel requirements seem as straightforward as the raw materials
requirements. However there are many conditions and factors in the product/service market that
influences and shape the quantity and mix of labor services demanded by the firm.
Planning for Derived Demand
In the strategic human resource management planning process, the mix and quantity of labor services
required can potentially span a large and variable range of skills and talents. Furthermore, simple
changes or shifts in the amount forecast can have dire consequences with respect to the profitability,
cost, effectiveness and efficiency of the firm.
For example, in the service related markets, firms tend to be labor intensive and it is not
unusual for the firm to spend anywhere from forty to eighty cents of each revenue dollar for
employees. In manufacturing these costs can range from thirty-five to sixty percent of revenue
(Henderson, 2005). Swings in profitability and efficiency are relatively sensitive to shifts in such labor
costs. With an overestimate of demand for human resources, the firm may take on substantially more
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