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Build or Buy? The Individual and Unit-Level Performance of Internally Versus Externally Selected Managers Over Time

American Psychological Association
Journal of Applied Psychology
Authors:
Philip Deortentiis at Michigan State University
Philip Deortentiis
Chad H Van Iddekinge at University of Iowa
Chad H Van Iddekinge
Robert E. Ployhart
Robert E. Ployhart
Robert E. Ployhart
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Tom D. Heetderks
Tom D. Heetderks
Tom D. Heetderks
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Abstract

At some point, hiring managers in all organizations face the decision of whether to fill open positions with internal candidates (e.g., through promotions) or to hire external candidates (e.g., from competitors or new entrants into the labor market). Despite this ubiquitous choice, surprisingly little research has compared the effectiveness of internal and external selection or has identified situations in which 1 approach may be better than the other. The authors use theory on human capital resources to predict differences between internal and external hires on manager- and unit-level outcomes. Analysis of data from a quick-service retail organization (N = 3,697) suggested that internally hired managers demonstrated higher levels of individual job performance and commanded lower starting salaries than externally hired managers. At the unit-level, operations led by internal hires demonstrated higher performance on organization-specific criteria (i.e., service performance), whereas no internal–external differences were found on more general criteria (i.e., financial performance). They also found some evidence that differences in unit service performance decreased over time (but did not diminish completely) as external hires improved at a slightly faster rate than internal hires. Overall, these findings underscore the complexity of the recurring “build or buy” decision. The results also suggest that internal hires generally outperform external hires, both individually and collectively, and they do so for less money.
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Build or Buy? The Individual and Unit-Level Performance of Internally
Versus Externally Selected Managers Over Time
Philip S. DeOrtentiis
Michigan State University
Chad H. Van Iddekinge
Florida State University
Robert E. Ployhart
University of South Carolina
Tom D. Heetderks
Compliance Systems, Inc, Grand Rapids, Michigan
At some point, hiring managers in all organizations face the decision of whether to fill open positions
with internal candidates (e.g., through promotions) or to hire external candidates (e.g., from competitors
or new entrants into the labor market). Despite this ubiquitous choice, surprisingly little research has
compared the effectiveness of internal and external selection or has identified situations in which 1
approach may be better than the other. The authors use theory on human capital resources to predict
differences between internal and external hires on manager- and unit-level outcomes. Analysis of data
from a quick-service retail organization (N⫽3,697) suggested that internally hired managers demon-
strated higher levels of individual job performance and commanded lower starting salaries than externally
hired managers. At the unit-level, operations led by internal hires demonstrated higher performance on
organization-specific criteria (i.e., service performance), whereas no internal– external differences were
found on more general criteria (i.e., financial performance). They also found some evidence that
differences in unit service performance decreased over time (but did not diminish completely) as external
hires improved at a slightly faster rate than internal hires. Overall, these findings underscore the
complexity of the recurring “build or buy” decision. The results also suggest that internal hires generally
outperform external hires, both individually and collectively, and they do so for less money.
Keywords: internal labor markets, promotions, external hiring, human capital, staffing
The effective use of human capital is a critical determinant of
organizational performance and competitive advantage (Nyberg,
Moliterno, Hale, & Lepak, 2014;Ployhart, Nyberg, Reilly, &
Maltarich, 2014). Staffing serves as one of the most important
human resource functions because it represents the primary means
by which organizations attract and acquire human capital (Ploy-
hart, 2006). Staffing involves numerous decisions, including how
to recruit potentially qualified applicants, how to assess whether
applicants possess the necessary qualifications, and, ultimately,
how to determine which candidates to select.
One of the most fundamental staffing decisions organizations
must make is whether to fill job openings through internal selec-
tion or external selection. Internal hires are workers who already
are members of an organization and (a) were selected into a
higher-level position from a lower-level position (i.e., an internal
promotion) or (b) were selected into the same or a similar position
from a different part of the organization (i.e., a lateral transfer). In
contrast, external hires are selected from outside the organization
and include individuals (a) who previously were employed by
another organization, (b) who previously were unemployed, or (c)
who were entering the labor market for the first time (e.g., recent
graduates).
Each of these two approaches to selection possesses potential
benefits and challenges. For example, internal candidates know the
organization’s culture, routines, and processes and have estab-
lished relationships with other current members. As such, internal
hires may “get up to speed” in their new role more quickly than
external hires (Krell, 2015). Further, an emphasis on promotion
from within may increase employees’ commitment to the organi-
zation (Mathieu & Zajac, 1990). On the other hand, although
selecting an internal candidate fills one open position, the position
the transferred or promoted employee came from now is open.
Thus, whereas one human capital need has been solved, another
has been created. Also, if multiple internal candidates apply for a
single job opening, candidates who were not selected may become
dissatisfied and engage in counterproductive behaviors, such as
reducing their effort or withdrawing from the organization (Spec-
This article was published Online First April 16, 2018.
Philip S. DeOrtentiis, School of Human Resources and Labor Relations,
Michigan State University; Chad H. Van Iddekinge, Department of Man-
agement, Florida State University; Robert E. Ployhart, Department of
Management, University of South Carolina; Tom D. Heetderks, Compli-
ance Systems, Inc, Grand Rapids, Michigan.
An earlier version of this article was presented at the 74th Annual
Meeting of the Academy of Management, Vancouver, Canada.
Correspondence concerning this article should be addressed to Chad H.
Van Iddekinge, The College of Business, Florida State University, 821
Academic Way, P.O. Box 3061110, Tallahassee, FL 32306-1110. E-mail:
cvanidde@fsu.edu
This document is copyrighted by the American Psychological Association or one of its allied publishers.
This article is intended solely for the personal use of the individual user and is not to be disseminated broadly.
Journal of Applied Psychology
© 2018 American Psychological Association 2018, Vol. 103, No. 8, 916–928
0021-9010/18/$12.00 http://dx.doi.org/10.1037/apl0000312
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