2. Value creation in the knowledge economy Università Roma TRE March 19th 2015 Prof. Aino Kianto School of Business and Management Lappeenranta University of Technology aino.kianto@lut.fi

3. Background Organizational performance is increasingly grounded on knowledge- related issues Managerial recognition 90% of managers in SF, RU and CH companies feel that knowledge is a key competitive asset for them (Kianto et al. 2011; Andreeva et al. 2011) Finnish companies estimate that 80-95% of value creation is based on knowledge and competences (IC Partners 2004) 99% of managers in Finnish growing and profitable companies such companies regarded knowledge as essential for their competitiveness However, only 1/3 of these companies were satisfied with their ability to leverage their knowledge assets. (Karuluoto 2006)

4. −Knowledge is the key factor of production −Intangibles (e.g. Brand) create a significant share of value added −Knowledge content of goods, services and processes is high −Knowledge is an important product in itself −Economic laws have changed −Ownership of knowledge is problematic −Intangibles can be used for multiple purposes simultaneously −Investments are risky −Nature of workforce has changed: knowledge workers −Novel types of organizations and management methods Knowledge economy

5. The knowledge-based view of the firm −Knowledge stocks and capabilities for managing them are the key value drivers −The nature of knowledge impacts its transferability and appropriability −Knowledge is subject to economies of scale and scope and increasing returns −Knowledge is dispersed −Individuals are intentional and intelligent agents −Firm = “a social community of voluntaristic action specializing in the speed and efficiency in the creation and transfer of knowledge” −Knowledge cannot be fully managed in the same sense as other types of resources; its management more resembles the creation of suitable contexts and cultivation. −Social capital as a coordination mechanism instead of authority (e.g. Grant (1996), Kogut & Zander (1996), Spender (1996), Foss (1996), Von Krogh (2000), Nonaka (1995)

6. Knowledge-based issues and firm performance The two key academic discussions addressing knowledge-based value creation in organizations: Intellectual Capital (IC) Knowledge Management (KM) literatures However, very few earlier studies systematically combining these approaches to examine the key knowledge-related factors impacting value creation in firms => How do IC assets and their management practices interact to create value?

7. Intellectual capital literature −Focuses on intangible resources that contribute to value creation (e.g. Edvinsson & Malone 1997; Sullivan 1998) −“knowledge-based resources that contribute to the sustained competitive advantage of the firm” −“knowledge that can be converted into profits” −Typically divided into three categories: human, structural and relational capital (e.g. Bontis 2001; Guthrie 2001) −The IC literature helps in identifying the kind of intangible resource stocks there are in firms and in assessing their level −HOWEVER −Are the 3 elements sufficient? −Renewal capital, trust capital, entrepreneurial capital? −What about the utilization and management of the resources? −=> KM literature

8. Knowledge management literature −KM focuses on the processes and practices for dealing with knowledge (e.g. Von Krogh 1998; Heisig 2009; Kianto 2011) −“identifying and leveraging the collective knowledge in an organization to help the organization compete” −”systematic handling of knowledge and potential knowledge within an organization” −”increasing organizational value creation through systematically developing its knowledge processes and increasing its strategic knowledge resources” −A plethora of more specific research foci: knowledge processes, contextual issues, tools, knowledge workers, etc. −Knowledge management practices = conscious and intentional management activities aimed to support efficient and effective utilization of knowledge for organizational benefit (Foss & Michailova 2009; Andreeva & Kianto 2012) −A variety of KM practices identified in the literature, spanning multiple functions of the firm and employed in idiosyncratic bundles −HOWEVER −Rarely addresses what exactly is being managed

9. The research project: ”Intellectual Capital and Value Creation” −Examines the current state of IC stocks and KM practices, and how these interact in firms’ value creation −Funded by Tekes (the Finnish Funding Agency for Technology and Innovation) −Duration 2013-15 −Survey research strategy −Partners in 8 countries −Lappeenranta University of Technology, Finland (The Core Team) −University of Rome 3, Italy −Hong Kong Polytechnic University, China −Deusto Business School, University of Deusto, Spain −St.Petersburg University Graduate School of Management, Russia −Educons University, Serbia −AUniversidade Lusiada, Portugal −Academy of Economic Studies, Bucharest, Romania

10. The overall research model INTELLECTUAL CAPITAL ASSETS KNOWLEDGE MANAGEMENT PRACTICES ORGANIZATIONAL PERFORMANCE COMPANY AND ENVIRONMENTAL CHARACTERISTICS Data source: = survey data = publicly available databases and survey data

11. Intellectual capital assets −Human capital (employee skills, motivation, expertise) −Structural capital (organization’s information systems, tools, facilities, databases, documents) −Internal relational capital (collaboration and mutual understanding within the organization) −External relational capital (collaboration and mutual understanding with key external parties) −Renewal capital (organizational creativity, learning and possession of up- to-date knowledge) −Trust capital (the climate of trust existing in intra- and inter-organizational relationships) −Entrepreneurial capital (risk-taking, intiative and identification of new opportunities by the organization)

13. Knowledge management practices −Strategic KM practices (the strategic planning and implementation activities related to the knowledge-based assets in the firm) −KM leadership (supervisory behaviors that support a knowledge-friendly culture, e.g. tolerance of mistakes, encouragement of active questioning) −Knowledge protection (protecting strategic knowledge by formal and informal means) −Human Resources Management practices (recruitment & selection, training & development, performance appraisal, compensation) −Learning mechanisms (means by which knowledge and skills are collected, shared and utilized, e.g. mentoring) −ICT practices (utilization of information technology for information search, analysis and distribution) −Organization of work (division of decision-making authority, enabling employee interaction, integration of heterogenous expertise)

15. How about the ”bottom line”? (Finnish firms) * positive siginificant correlation with ROE or ROA 2013 *

16. Conclusion −In the current knowledge economy, a significant portion of value creation is due to knowledge −Knoweldge-based value creation is due to −Intellectual capital −Knowledge management practices −These issues differ between companies and contexts, and can be reliably assessed and systematically developed