Intellectual Capital Driven Performance: Role of Innovative Performance and Business Process Capabilities

• Author: WASIM UL REHMAN, AYAZ AHMAD, FARUKH BASHIR and SANA AZEEM

Abstract. Theory of resource based view (RBV) postulates intangible resources as strategic resources which tend to provide sustainable competitive positioning for a firm to survive in a fast-paced highly dynamic market place. This study attempts to demonstrate the impact of intangible resources i.e. intellectual capital (IC) resources on firms’ performance. Further, the paper also aims at specifying the optimal mediating mechanism for IC driven performance in the presence of business process capability and innovative performance as intermediate measures. Using the key informant approach a survey was conducted and a valid sample of 660 middle and senior level employees was considered for analysis. Convergent and discriminant validity is examined by observing the values of loadings and average variance extraction (AVE) before proceeding for further model estimation.

However, fitness of the model is examined through observing the values of absolute, incremental and parsimonious fit measures using confirmatory factor analysis (CFA). The results of the study imply that IC’s components not only directly affect the performance but it also indirectly influences the performance through business process capability and innovative performance. Based on the findings of the study, this piece of effort suggests that managers need to explore more intellectual resources in order to align the business process capability and innovative performance for superior performance outcomes.

Keywords: Intellectual Capital, Business Process Capability, Innovative Performance, Performance

1. INTRODUCTION

   A recent change in global knowledge economy consisting of intangible resources provides sustainable performance to firms in a turbulent and competitive environment (Teece et al., 1997; Subramaniam and Youndt, 2005a, 2005b). In era of knowledge based economy, the appearance of intellectual capital (IC) has attracted lot of recognition as a driver of competitive positioning (Sharabati et al., 2010), where most of the firms have failed to understand its significance in earlier (Collis, 1996). This influential phenomenon has led the aim of transition of traditional industrial economy in knowledge economy (Guthrie et al., 1999). According to theory of resource based view (RBV), intangible assets cognized as knowledge resources provide better performance outcomes than tangible resources (Bogner and Bansal, 2007).

   Previous research defines IC as personnel skills, firms’ routines, network relationships and collective know-how that reside inside of intellectuals of organization (Kong, 2008; Stewart, 1997). It is also recognized as strategic valuable resource for firms’ performance to gain constant competitive edge (Schiuma and Lerro, 2008; Kong and Prior, 2008; Chen, 2008). Knowledge economy presented it as a source of ‘economic value’ covering three major facets of non-physical assets of a firm which includes human, organizational and social capital. Extant of strategic management literature postulates that intellectual capital is a valuable and non-compatible resource used to link firms’ capabilities with sustainable performance (Karkoulian et al., 2013; Barney, 1991). Interestingly, recent academic research views IC as a key strategic driver for business growth and performance (Tovstiga and Tulugurova, 2007; Huang and Liu, 2005).

   However, very little attempts were made to know that how innovation and business process capabilities mediate the relation to bring out better IC oriented performance.

   Although, it is robustly accepted that organization capability to innovate is extensively relies on its ‘ability to exploit knowledge or intellectual assets effectively (Subramaniam and Youndt, 2005a). Innovation is acknowledged as driving element to leverage the value creation and performance at firms’ level (Griffith et al., 2006). Firms’ capability to get sustainable performance outcomes are based on their dynamic capability i.e. innovative performance through leveraging, grasping and reconfiguring IC appropriately (Hsu and Wang, 2012). Further, innovative performance provides competitive positioning in a dynamic environment if the firms integrate, sensing and restructure the internal, external and human capability efficiently (Teece et al., 1997).

   Massive investments on knowledge resources e.g. intellectual capital are required to innovate the organizational processes, structures and products for superior performance outcomes. Recent academic research points out the strategic role of innovation for leveraging competiveness and IC driven performance (Gao et al., 2009). Studies found that intellectual referred as knowledge assets are the basic inputs or treated as raw material for value creation process of organization which comes through innovation to leverage the superior firms’ performance over the period (Marr et al., 2004; Gao et al., 2009). Similarly, studies also imply that IC is considered as primary source of input for value creation through aligning business process capabilities of organization (Gold et al., 2001; Smith and Mills, 2011).

   Few studies advocate that business process capability in terms of customers’ and suppliers’ intimacy and further flexible production processes positively augment the organizational performance measures (Rai et al., 2006; Santhanam et al., 2007; Ray et al., 2004). Recent study points out that business process capability mediates the relation for IC driven performance (Wu and Chen, 2014). This study advocates that firms required substantial investment on internal, external and human capital which further help to structure organization’s inside-out, outside-in and spanning capabilities to get better performance standard.

   Though, plenty of academia research addresses the relationship of IC and firm’s performance, however, many firms belonging to knowledge oriented sectors with experienced human capital, dynamic organizational processes and structures, information systems and diversify intimate with customers and suppliers failed to yield innovative performance to get the better performance outcomes (Han and Li, 2015). Previous debate also concludes that more investment initiatives on knowledge assets e.g. ‘human capital, structural and relational capital’ improves the firm’s innovative capability in terms of operational excellence and product development and business process capability i.e. inside-out, outside-in and spanning could be a result of better sales growth and revenues (Wang and Wang, 2012; Huang et al., 2010). However, there is a scarcity of literature that how both concepts i.e. innovative performance and business process capability works together to mediate the relationship for IC driven performance.

2. THEORETICAL BACKGROUND AND HYPOTHESIS

   INTELLECTUAL CAPITAL (IC) AND PERFORMANCE

   The conceptualization of IC is very difficult to understand due to dynamic and invisibility. It often uses interchangeable as intellectual capital, intellectual assets or knowledge assets. IC comprises entirety of all knowledge assets or intangible assets that determines the firm’s superior performance (Roos and Roos, 1997; Subramaniam and Youndt, 2005). Initially, IC was used to capture the difference between organization book and market value (Stewart, 1994). Later on, research conceptualized IC as hidden asset difficulty to find on companies’ balance sheet; intellectual property rights, organizational philosophy and culture, employees experience and skills (Edvinsson and Malone, 1997; Stewart and Ruckdeschel, 1998). These assets paved the way to form the positioning (Youndt et al., 2004; Sharabati et al., 2010).

   Literature suggests that IC works for value creation and extraction though utilizing knowledge held by employees, captured in organizational data bases, business processes and relational capital (Zharinova, 2011; Sullivan, 1999; Youndt et al., 2004). As recommended in introduction that knowledge drives the economy to get competiveness which comes through optimal utilization of scarce IC with every possible means (Sveiby, 1998; Dumay, 2013; Edvinsson and Sullivan, 1996). IC is the composition of human capital, structural capital and relational capital (Bontis, 1998; Rehman et al., 2011; Roos et al., 1997; Malone, 1997).

   Human capital refers to integration of explicit and tacit knowledge of individual though education, trainings, mental agility and previous employment (Sveiby, 1997; Roos et al., 1997). Studies also describes that human capital is the intellectual ability, experience and knowledge of employees which resides in their brain and used by firm’s staffs and executive (Subramaniam and Youndt, 2005; Schultz, 1961). Actually, organization needs employees with excellent capability of problem solving to make effective decisions. Therefore, it is considered a valuable strategic and dynamic resource in a rapidly changing environment (Mengistae, 2006; Bontis et al., 2007). As organization services and products are always rendered and provided by employees, hence it always anticipated that organization performance in terms of customer intimate, operational excellence and product development is closely connected with human capital efficiency (Cabello-Medina et al., 2011).

   Further, studies indicate that firms which invest more on human capital...