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Structural relationship between knowledge management and the growth of the activity in the Galician SMEs with greater strategic focus on innovation

Structural relationship between knowledge management and the growth of the activity in the Galician SMEs with greater strategic focus on innovation
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  Structural relationship between knowledge management and the growth of the activity in the Galician SMEs with greater strategic focus on innovation 1 Structural relationship between knowledge management and the growth of the activity in the Galician SMEs with greater strategic focus on innovation Miguel González Loureiroa (*) , Pedro Figueroa Dorrego b a Associated Professor. Department of Management and Marketing, University of Vigo, Faculty of Social Sciences and Communication, Campus A Xunqueira, s/n 36005, Pontevedra (Spain); email:  b Titular Professor . Department of Management and Marketing, University of Vigo, Faculty of Social Sciences and Communication,, Campus A Xunqueira, s/n 36005, Pontevedra (Spain); email:  Structural relationship between knowledge management and the growth of the activity in the Galician SMEs with greater strategic focus on innovation 2 TITLE: Structural relationship between knowledge management and the growth of the activity in the Galician SMEs with greater strategic focus on innovation ABSTRACT: The aim is to obtain a set of variables which report about knowledge management and intangible in the innovative SMEs in Galicia. This is a first approach to a model of structural relationships between both and the growth of the activity of the SMEs with greater focus on innovation. Several authors have pointed out the importance of knowledge and innovation as basic factors of competitiveness. Other authors have studied the relationships between some elements of intellectual capital and  business performance. Through the literature review done, a set of relationships has been developed and contrasted in 163 SMEs. Must be stressed the importance of the structural capital (SC) in the internal management of innovation in SMEs. Furthermore, the growth of their activity can be explained mainly by SC. Human Capital influences the growth rate indirectly, especially through the structural capital and, to a lesser extent, through the relational capital. KEYWORDS: knowledge management, innovation, performance, small and medium enterprises, structural relations  NUMBER OF WORDS (including abstract, keywords, full text, appendix and references): 6.856 1.   Contextual framework  Nowadays, innovation is postulated as one of the basic factors of competitiveness in an international competitive environment. Besides this, there are a wide range of references regarding to the need for appropriate corporate governance indicators linked to knowledge and intangibles in the small and medium enterprises (SMEs). Some authors state that business success is based more on strategic direction and on knowledge management as a resource and less on physical and financial resources (Bontis, 1998). It is also commented that knowledge is the most important strategic resource for the business (Choo and Bontis, 2002). Competitive advantage based on knowledge maybe is the most sustainable in the medium term (Sveiby, 2007; Davenport and Prusak, 1998), noting that the competitive advantages that are sustainable over time result in superior  business performance (Peteraf, 1993). Some authors have research about the impact of the management of intellectual capital (IC) on various business  performance inicators. Within this line of research, some authors support that the most successful companies are using their own knowledge assets better and faster than their competitors do (Bontis et al., 1999; Teece et al., 1997). Therefore, it is advisable to conduct researches about the degree of relationship among elements of strategic management of knowledge, business intangibles and their impact on specific business performance. These ones can be essential from the perspective of management innovation. In this research, we review the relevant literature on models relating variables of intellectual capital and corporate  performance, targeting an initial outline of a model applicable to companies with greater strategic focus on innovation. Specifically, it has been contrasted in an application to this kind of companies in the business system of Galicia, through a system of structural equations. Satisfactory results have been obtained on the empirical validity of the model, which allow some conclusions from the perspective of strategic leadership and management in regional innovation systems. 2.   Theoretical context: knowledge management, intellectual capital, corporate perfomance and innovation management There is a wide consensus in stressing the innovation as a key factor in business competitiveness (European Commission, 2006; Barney, 1991; Geroski et al., 1993; Do Rosário Cabrita, 2006; Edvinsson and Kivikas, 2007), especially considering the current strategic challenges: globalization, increasing competitive intensity and competitive orientation in differentiation. In any case, it seems that the optimal management model should be an appropriate mix of the model of Porter's five competitive forces and so-called core competencies of the organization. The first, more focused on strategic management of the environment (Porter, 1998, 1980) and the second, more focused on internal management (Hamel and Prahalad, 1994). Moreover, there are researches which points out that success in business management will be based largely on the strategic management of knowledge as a resource, rather than physical and financial resources (Bontis, 1998), still regarded as the most valuable strategic resource for the company (Choo and Bontis, 2002). Competitive advantage based on knowledge is, maybe, the most sustainable in the medium term (Sveiby, 2007; Davenport and Prusak, 1998), noting that the competitive advantages that are sustainable over time offers a superior business performance (Peteraf, 1993). It therefore seems advisable to deepen on the relationship  between knowledge management, innovation management and their effects on coporate performance. There is an increasing orientation to relate the innovation capacity of an organization and management of knowledge measured by its IC, as reflected in the various editions of the Oslo Manual (Organization for Economic Cooperation and Development-OECD, 2005, 1997, 1992; Umemoto, 2002). Innovative companies, technology intensive, are often those in which intangible assets play a critical role in business success (Cañibano Calvo et al., 2002). A clear relationship exists between the innovativeness of an organization and its IC (Umemoto, 2002). The relationship  Structural relationship between knowledge management and the growth of the activity in the Galician SMEs with greater strategic focus on innovation 3  between IC and innovation is studied from different angles (Santos Rodrigues, 2008; Cohen and Levinthal, 1990;  Nahapiet and Ghoshal, 1998, 2002; Nonaka and Takeuchi, 1995; Subramaniam and Youndt, 2005): •   The IC as an input of the innovation. •   The innovation as a result of the use of its knowledge and its CI. •   The process of innovation as a process of knowledge management. Innovation is a way of creating more value in the firm (Sveiby, 2000; Von Krogh and Roos, 1996). It therefore seems that firms with greater strategic focus on developing innovations should have higher ratios of value creation, which is intended to contrast in this research in the case of the Galician SMEs. On the other hand, there is a topic research that relates elements of IC and business performance variables using structural equations, with its main researcher Nick Bontis of McMaster University in Ontario (Canada), director of the Institute for Intellectual Capital Research. In their model (Bontis, 1998), they concluded the existence of causal relationships between various elements of IC and corporate  performance explanatory variables. In particular, they developed three possible model specifications, finding the applicability of all of them, but particularly noted the potential of diamond specification. Regarding to corporate performance indicators, there is a certain degree of consensus on the fact that these must be multi-dimensional in this kind of research (Venkatraman and Ramanujam, 1986). They were the pathfinders in considering this construct with both financial and non financial indicators to achieve an efficient measure of the named corporate  performance in strategic researches. Most of the researches about this topic, found that the financial measures (return on assets, operating margin...) provide information about the past, whereas that non financial measures (market share, market value of shares...) provide information about the expectations that stakeholders deposits on the possible future development of the company. The models which include multi-dimensional indicators provide a better understanding of business  performance, both present and future (Kaplan and Norton, 1992). The financial measures of results by the accounting traditionally used as the return on assets (ROA) or return on equity (ROE) are inadequate for strategic decision making (Bontis et al., 1999: 394). These measures were valid for the industrial era, but not for the knowledge era in which managers must lead and manage capabilities and competencies (Kaplan and Norton, 1992; Bontis and Fitz-enz, 2002: 627). In the review done, it has no model linking simultaneously variables of CI with the capability of growth of sales and value creation in companies with greater strategic focus on innovation. The growth of the sales shows the market acceptance of a company products, thus it is an indicator of success in its expansion through innovation (Zahra and Das, 1993: 25; Zahra and Covin, 1994: 200; Zahra and Bogner, 1999: 156; Donate Manzanares, 2007: 219). Specifically, the value added by the organizations is one of the most important indicators at present, taking into account the socioeconomic situation of generalized crisis in recent times (2008 onwards). In the discourse on knowledge management and IC, the value of the company (market value) is considered as the combination of tangible value- book value on the accounting books, coming mainly from traditional forms of capital, such as physical capital and monetary- and intangible value, the intellectual capital, which comes from human capital, structural and relational (Roos and Roos, 1997; O'Donnell et al., 2000). Many scholars have proposed to directly measure the stock of IC (Roos and Roos, 1997), which is a proxy value of the company (Tseng and Yeong-Jia, 2005: 192). Therefore, it is necessary to have information on the extent of knowledge management of an innovative company favours the growth of its value added and sales, to ensure its future survival. Moreover, it contributes to identify what variables of knowledge management embodied in its IC are those that facilitate further growth. In this case, it suggests that the greater the interrelationships between human, structural and customer capital, the greater the value generated (Petrash, 1996: 367). Some researchers have concluded the existence of significant differences between companies considered more and less innovative. Among them, some researchers proved that there are differences in multiple areas, for an instance in the very nature of companies, its strategies, the development of innovation-related activities and, at last, on its business  performance (Baldwin and Johnson, 1996: 789). These researchers found that the most innovative companies did  better figures than the less innovative ones in a wide range of  performance indicators (some related to the rate of growth in market share, anothers related to the return on investment ...). In the case of companies highly oriented towards the development of innovation strategies, the effect of innovations on the performance is affected by the time lag between the innovation developed and the results derived from it. It notes the existence of a period, not clearly fixed, which differs from the results of innovation performed (Zahra and Das, 1993; Zahra 1996; Zahra and Bogner, 1999), as indeed the innovation process is highly uncertain and its effects, since it follows a course of action until results are achieved, can differ in time (Kanter, 2000). For an instance, it is proved that  process innovations can improve performance measures in a short time, helping managers to streamline operations and increase efficiency, productivity and cost savings. On the opposite, product innovations may reduce profitability in the short term due to the investments required to developing and  positioning these products in the market (Zahra, 1996). Therefore, it is advisable to work with this kind of measures taking time into account, for example by calculating their average, to avoid the possible effect of random fluctuations and anomalies in the data (Youndt et al., 2004: 347).   Structural relationship between knowledge management and the growth of the activity in the Galician SMEs with greater strategic focus on innovation 4 3.   Methodology 3.1.   Sample procedure and data collection The main objective of this research is to analyze the relationship between representative elements of knowledge management and growth rates of entrepreneurial activity, following the premises of the existing relevant literature (mainly initiated by Bontis, 1998 and followed by Do Rosário Cabrita and Bontis, 2008; Kamath, 2008; Mavridis, 2005, among others) applied to the case of the Galician companies with greater strategic focus on innovation. In these most innovative companies in Galicia, it is intended to contrast the following hypothesis in the model: (H 1 ) Human Capital proxy variables (HC) are directly and  positively related to Structural Capital proxy variables (SC). (H 2 ) Human Capital proxy variables (HC) are directly and  positively related to Relational Capital proxy variables (RC). (H 3 ) Structural Capital proxy variables (SC) are directly and positively related to the indicator variables of the rate of growth of the business-turnover and gross value added- (called “activity biennial growth rate”). (H 4 ) Relational Capital proxy variables (RC) are directly and positively related to the indicator variables of the rate of growth of the business-turnover and gross value added- (called “activity growth rate”). As differentiating aspects of this work, can be highlighted: •   Extension of the construct of Customer Capital (Bontis,1998), to the Relational Capital concept. •   The performance construct is restricted to the measurement of activity growth rate (turnover and gross rate). •   A job of selection has been done on the constructs of HC, SC and RC, to shorten from 333 inital variables to 36 in a first step and, finally, obtaining 15 ones, which are the best items to explain the entrepreneurial activity growth rates. Statistical information corresponds to a representative sample of 163 companies from the business system of Galicia, which in 2003 showed a greater strategic focus on innovation and,  besides this, full information was available about their turnover and value added in 2003 to 2005 in the official Commercial Register. Figure 1 shows the business chains in which companies are grouped, their frequency and percentage. It was necessary to wait from the date of completion of the initial survey (2003) for the economic and financial information of later years (2003, 2004 and 2005), so it can be evaluated the medium-term effect of the innovations over the  performance. The selection of the types of SMEs that show a greater focus in innovation was made by the researcher Fernandez-Jardon under the framework of the Strategic Innovation Plan of Galicia-2010 (Fernández-Jardon Fernández, 2005; González Gurriarán et al., 2005). In that investigation, the same author made a categorization of firms into two groups according to their degree of cultural orientation to innovation. From a factor analysis on variables that refer to the set of potential indicators of innovation, structural variables were identified that allowed that categorization. Thus, the structural variables that allowed the categorization were: technological upgrading, technological innovation, organizational innovation in the markets, organizational innovation in the company, strategic culture of innovation and organizational culture of innovation. Along with these variables were included another ones that measured directly other aspects of innovation, such as the degree of satisfaction with the innovation made and the existence of innovation-oriented departments. A subsequent analysis of results from  both types of companies allowed testing the validity of these variables to make that sort. Figure 1: Characterization of the sample, frequencies and percentages by business chains Population 174,503 companies with activity in the Autonomus Community of Galicia-Spain (data referred to the 2003) Sample 608 companies Sample method Stratified sample with minimum quota and the rest proportionately and randomly within the quota Error at tables (p=q) 4.64% with a reliability of the 95.50% Response rate 441 surveys received, representing 72.5% of the sample. From these, 208 companies have  been detected with greater focus on innovation, and there was full economic and financial information from a total of 163 companies for the 2003, 2004 and 2005 years Date of completion Between July, 11th and October, 15th 2003, with face questionnaire.  Structural relationship between knowledge management and the growth of the activity in the Galician SMEs with greater strategic focus on innovation 5 Business Chains Frequency Percentage Agriculture, livestock and its processed products 9 5,52% Automotive and motor vehicle industry 13 7,98% Manufacture of machinery and equipment, and another non-specific ancillary industry 15 9,20% Retailing commerce, wholesale and other non-specific distribution 6 3,68% Shipbuilding 6 3,68% Construction and real estate 9 5,52% Educational, health and ambiental services 9 5,52% Energy production and distribution 8 4,91% Forestry and wooden-made products 14 8,59% Information, culture and related services 7 4,29% Logistics and transport 5 3,07% Metallurgy, minerals and fabricated metal products 5 3,07% Fisheries, seafoods and its processed products 6 3,68% Chemical and pharmaceutical 7 4,29% Ornamental rocks and other non-metallic mineral products 6 3,68% Financial services 2 1,23% Information and communication technologies 16 9,82% Textile, clothing and leather industries and its accesories 13 7,98% Tourism, leisure and related 7 4,29% Total 163 100,00% Source: own drafting from data of the survey made to companies As it is shown (Figure 1), the sample is respresentative of the whole business system of Galicia, because every business chains, in which an enterprise system can be segmented, are  presented at this sample. A first conclusion can be remarked about the type of business chains mainly present in this system,  because there are a higher relative weight of industrial activities (equipment, forestry-wood ...) and a lighter weight the business chains of services (financial services, tourism and leisure ...). Significant differences can be observed among some business chains regarding to the characterization of turnover and average value add in the reporting period from 2003 to 2005 (see figure 6 in the Appendix). In particular, there is a remarkably higher relative weight in the average turnover and value added of firms from the chains of Energy and Construction-real estate (with index numbers of 540 and 421 on the base 100 of the global average of all shown). Such  peculiarity is characteristic in this kind of comparison between chains of a given business system, since there are differences due to the type of activity developed. For an instance, in the case of the Construction and real estate must take into account that the period under review was at the boom of these activities in Spain and Galicia. Hence, it is advisable to evaluate the indicator about the ability of the company to generate value in developing their business, in addition to the turnover. That indicator is the value added that can be divided  by the turnover to check the ability of a sector to provide value to external inputs. This ratio (see data in the last column of the figure 6 in the Appendix) shows significant differences  between business chains, depending on whether it is transformative or service activities (logically, in this last ones the relative weight of buying raw materials it is very low). 3.2.   Data analysis Once purified the data through a factor analysis, a work with causal diagrams was made, "Path", trying to obtain causal models among the knowledge management variables and its IC, and the rate of growth of activity. This work was done with the program AMOS for Windows, v7.0. As a prelude to the estimation of parameters, it must be determined what should be the type of matrix to analyze (Lévy Mangin, 2003: 789-790). In this case, AMOS works with the variance-covariance matrix, so would be necessary to interpret the data in terms of measurement units. To avoid this, it is requested the output with standardized solutions.
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