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A CONCEPTUAL FRAMEWORK OF INNOVATION AND PERFORMANCE: THE IMPORTANCE OF LEADERSHIP, RELATIONSHIP QUALITY, AND

KNOWLEDGE MANAGEMENT

Jeffrey Overall, Nipissing University

ABSTRACT Innovation is an important antecedent of organizational performance, but it is also one of the most knowledge-intensive activities and it does not come easy. However, through trusted leadership, employees begin to develop a sense of commitment and satisfaction toward their employing organization, which stimulates creativity that can lead to innovation. Given the importance, in this research, it is argued that leadership, knowledge management, and the relationship quality construct comprised of trust, commitment, and satisfaction, are important dimensions of the innovation-performance relationship. By synthesizing three streams of research, namely: social capital, the resource-based view of the firm, and relationship quality, I contribute to the innovation literature by developing a conceptual framework of innovation and performance. Propositions are included whilst implications for managers and future directions are suggested.

INTRODUCTION

To maintain a sustainable competitive advantage in the hypercompetitive marketplace,

innovation (Gunday, Ulusoy, Kilic, & Alpkan, 2008; Rosenbusch, Brinckmann, & Bausch, 2011; Van Auken, Madrid-Guijarro, & Garcia-Perez-de-Lema, 2008), defined as a construct that captures the newness of a product or service that can increase organizational performance (Bowen, Rostami, & Steel, 2010), is essential (Caselli, Gatti, & Perrini, 2009). Organizations that innovate can grow their profits, size, and market share (Van der Panne, Van Beers, & Kelinknecht, 2003) by increasing the value of the products and services that they offer (Caselli et al., 2009). This, in turn, leads to continuous improvement, efficiencies, and, eventually, profitability (Caselli et al., 2009). Indeed, the ability to innovate and differentiate from the competition whilst shielding one’s organization from external factors is vital to long-term success (Hult, Hurley, & Knight, 2004; Jimenez-Jimenez & Sanz-Valle, 2011; Lin & Chen, 2007).

Given the importance, managers perpetually strive to foster innovation throughout their hierarchies by organizing corporate retreats, design thinking courses, and recruiting management consultants. These activities can be useful, but innovation is one of the most knowledge- intensive activities, which encompasses the collective knowledge within an organization (Caselli et al., 2009), and does not come easy. Innovation is dependent on an organizational culture that incentivizes creativity. Through this, organizations eventually become breeding grounds for innovation (Caselli et al., 2009). To achieve this level of innovation, leadership is important. According to the resource-based view (RBV) of the firm, which is based on viewing

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organizations as pools of resources, capabilities, knowledge, intangible assets, skills, and leadership (Chisholm & Nielson, 2009; Mention, 2012), the collective knowledge and skill-set within an organization are crucial to success (Chisholm & Nielson, 2009; Henton, Melville, & Walesh, 2009; Mention, 2012).

Social capital, which is based on the premise that external networks, cultural norms, and trust facilitate the communication, cooperation, and coordination of activities (Putnam, 1995; Rodriguez, Perez, & Gutierrez, 2007), can lead to the development of innovation and, eventually, success (He & Poh-Kam, 2012; Rogers, 2004; Romijn & Albaladejo, 2002). Considering that leaders are vitally important to instilling a value-system within an organization, fostering best practices, and developing a culture that can stimulate collaboration and motivate employees, social capital is a function of leadership, which has been suggested to be an important antecedent to innovation (Garcia-Morales, Jimenez-Barrionuevo, & Gutierrez-Guiterrez, 2012; He & Poh- Kam, 2012; Montes, Moreno, & Morales, 2005). Through leadership activities, organizational members begin to develop a sense of trust in the integrity and reliability of their leader, which can subsequently develop commitment and satisfaction among the workforce (Caceres & Paparoidamis, 2007). Both trust and commitment are considered two dimensions of social capital.

In the customer relationship management literature, relationship quality, defined as the overall strength of a relationship that is capable of meeting the needs, wants, and expectations of business partners (Woo & Ennew, 2004), is vital to establishing and prolonging long-term relationships (Morgan & Hunt, 1994; Singh et al., 2012). Relationship quality is composed of the commitment, trust, and satisfaction that business partners experience in exchange relationships (Athanasopoulou, 2009; Fynes, Voss, & Burca, 2005; Lambe, Wittman, & Spekman, 2001). In their research, Yli-Renko et al. (2001) determined that fostering and managing effective relationships can lead to knowledge sharing, acquisition, and exploitation. Eisingerich, Rubera, and Eifert (2009) found that the organizations that were able to foster greater commitment and high-functioning inter-organizational relationships were not only more innovative, but more productive than other firms. Indeed, commitment gained from valued relationships stimulates trust within an organization that leads to engagement (Putnam, 1995). Although relationship quality has not been studied within the context of knowledge management, leadership, and innovation, it is clearly not only relevant to the RBV of the firm, but also social capital.

The main contribution to knowledge of this research is the synthesis of three streams of theory, namely the RBV of the organization, social capital, and relationship quality within a conceptual framework of innovation and performance. In the first section of this paper, the theoretical framework that forms the foundation of the conceptual model is discussed. In the second section, the conceptual framework of innovation and performance is presented. In the final section, implications for managers are discussed and future directions are suggested.

THEORETICAL FRAMEWORK

Social capital involves networks of social interactions between colleagues, customers, suppliers, superiors, and stakeholders, in general, which are vitally important to creating value (Hitt et al., 2002). Considering that organizations rarely have adequate resources to compete in the marketplace, social capital is necessary. Put differently, it is rare that organizations are capable of being fully integrated or self-sufficient and, thus, require assistance from external networks to attain objectives (Hitt et al., 2002). These external networks are essential to

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attracting customers, suppliers, identifying entrepreneurial opportunities, and fostering innovation (Lee et al., 2001). These relations might involve buyer-supplier interactions that could entail business-to-business and business-to-consumer networks.

Although primarily based on external networks, social capital seems relevant to internal networks, those within the boundaries of an organization and, in particular, the employee- management network. Given the importance of trust and commitment in the employee- management relationship (Vaccaro, Parente, & Veloso, 2010), leadership appears to be important to social capital (Hitt et al., 2002). Considering the relevance of social capital to internal resources, researchers (Lee et al., 2001; Yeoh, 2004) have called for the synthesis of social capital with internal networks. In this context, social capital is created when, under the guidance of leadership, employees strive for the same vision, objectives, and goals, which can form a collective aim and a group identity with permanent and stable links (Ferragina, 2010). However, social capital can only occur when leaders have instilled trust among employees (Hitt et al., 2002). Social capital is not only founded on the structure of the relationship, namely trust, reciprocity, and mutual gain, but it is also involves the quality of the relationship (Hitt et al., 2002; Stone et al., 2003). When the quality of the relationship is high and valued by all members of the organizational hierarchy functioning under the leadership, there is a greater chance of employee loyalty to the organization (Athanasopoulou, 2009). Through this loyalty, sustainable competitive advantages and, eventually, success can occur (Hitt et al., 2002). Indeed, relationship quality is the most vital element of social capital (Hitt et al., 2012).

Founded in the services marketing literature (Grönroos, 1994, 2000), the relationship quality construct is used to define business relationships (Ulaga & Eggert, 2006). In the extant literature, commitment, trust, and satisfaction have been found to be interrelated and highly correlated (Caceres & Paparoidamis, 2007; Dagger & O’Brien, 2010; De Canniere, De Pelsmacker, & Geuens, 2010; Morgan & Hunt, 1994). Considering the high correlations, relationship quality has been conceptualized as a higher-order construct comprised of commitment, satisfaction, and trust (Athanasopoulou, 2009; De Canniere et al., 2010; Rauyruen & Miller, 2007). Trust is contextualized as the level of reliability and integrity that translates into confidence that one party feels toward another (Athanasopoulou, 2009). Commitment is defined as an employee’s willingness, motivation, and desire to make efforts to strive for a collective goal within their employment context whilst maintaining a valued employer-employee relationship (De Wulf et al., 2001; Garbarino & Johnson, 1999). Satisfaction is defined as an employee’s emotional state resulting from the relationship, in general, between his or her employer (De Wulf et al., 2001). In the main, relationship quality involves the mutual trust that is held between leaders and their subordinates, their commitment to the relationship, and their overall level of satisfaction (Leonidou et al., 2006). In other words, the happier employees are under the guidance of leadership and their level of motivation toward achieving a common goal, the more comfortable they will be and, subsequently, likely they will achieve said goal.

Indeed, social capital is a relational-based phenomenon that involves the shared resources that are embedded in these relationships (Huang, Lai, & Lo, 2012; Liao & Welsch, 2005). In many organizations, these resources are increasingly centred on intangible assets and knowledge, in particular, is becoming vital (Chisholm & Nielson, 2009). From the RBV, social capital can be used to not only access knowledge, but also to exploit collective knowledge to attain mutual ends, such as innovation and organizational success (Henton et al., 2002; Hitt et al., 2002). In the RBV literature, organizations are viewed as entities comprised of unique resources and these resources are capable of affecting, either negatively or positively, firm performance (Lee et al.,

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2001). The RBV contrasts the population ecology literature whereby it is contended that organizational successes and failures are a result of external factors, such as industry lifecycles, population density, organization size, and age (Aldrich, 1979; Donaldson, 1995). Through the RBV of the firm, researchers focus on the internal factors that can contribute to success, which typically involve valuable, scarce, non-substitutable, and difficult to replicate resources (Bolino et al., 2002; Hoelsher, Hoffman, & Dawley, 2005; Lee et al., 2001; Mention, 2012; Pearson et al., 2008; Santoro & Chakrabarti, 2001). Bolino et al. (2002) contended that high-quality relationships between employees and leadership (i.e., social capital) are intangible, valuable, rare, and not easily replicated, which can contribute to competitive advantages. Given the importance of internal relationships, Lee et al. (2001) advocated for the synthesis of RBV with social capital (Yeoh, 2004).

It has been argued that social capital can influence the commitment that employees have to the organization, which can develop high-levels of intellectual capital (Bolino et al., 2002), such as knowledge. Indeed, the scarce resources that are typically difficult to replicate have increasingly been associated with harnessing and managing organizational knowledge (Huang & Li, 2009; Santoro & Chakrabarti, 2001; Thornhill, 2006). As such, it has been suggested that knowledge management, which is a function of strong leadership and the quality of the relationships internal to a firm, can stimulate innovation (Matzler, Schwartz, Deutinger, & Harms, 2008; Mention, 2012; Radas & Bozic, 2009). In the innovation literature, it is argued that the companies that are able to innovate and respond to market trends quickly can grow faster compared to their non-innovative counterparts (Harms et al., 2010; Jimenez-Jimenez & Sanz- Valle, 2011). In the conceptual framework of innovation and performance (Figure 1), the relationship between leadership, relationship quality, and knowledge management are postulated to have a positive impact on innovation and performance.

Figure 1

Framework of Innovation and Performance

Commitment

Satisfaction Relationship

Quality Innovation

Trust

Leadership Knowledge Management Performance

CONCEPTUAL FRAMEWORK OF INNOVATION AND PERFORMANCE

Peter Drucker, the management guru, emphasized the importance of innovation and advocated that it should be a core competency of all organizations (Lin & Chen, 2007). Leadership has been shown to positively influence organizational innovation (Lyon & Ferrier, 2002) and has been suggested to be one of its most important determinants (Jung, Chow, & Wu,

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2003). There are two types of leadership styles: transformational and transactional. According to the former, transformational leadership has been contextualized as a leadership style that “… heightens consciousness of collective interest among the organization’s members and helps them to achieve their collective goals” (Garcia-Morales et al., 2012, p. 1040). For the latter, transactional leadership is based on promoting the individual interests of the leader and, subsequently, his or her followers in “… attaining the satisfaction of contractual obligation on the part of both by establishing objectives and monitoring and controlling the results” (Garcia- Morales et al., 2012, p. 1040). In general, leadership has been shown to positively influence innovation (Crossan & Apaydin, 2010), but transformational leadership has been shown to be slightly more important (Jung et al., 2003).

From the extant literature, it has been argued that an organizational culture, which is a function of leadership (Garcia-Morales et al., 2008), influences knowledge management (Otero- Neira, Arias, & Lindman, 2013). Crossan et al. (2010) argue that leadership influences knowledge management, which subsequently impacts innovation. Although leadership is important, it has been argued that organizational learning and knowledge have a stronger and direct influence on innovation, which implies that leadership, might indirectly impact innovation, potentially through knowledge management (Aragon-Correa, Garcia-Morales, & Cordon-Pozo, 2007).

Dodgson (1994) contended that relational interactions or the quality of relationships, which he termed as collaboration, were vitally important to establishing knowledge within organizations. The commitment that employees have to their relationships has been proven to enhance organizational knowledge (Eisingerich, Rubera, & Eifert, 2009). Furthermore, trust is vitally important to fostering knowledge within an organizational context (Vaccaro, Parente, & Veloso, 2010). Similarly, Huang and Li (2009) argued that social interactions are positively related to knowledge management, which in turn influences innovation. In general, there is a positive association between relational interactions and knowledge management (Huang, Lai, & Lo, 2012). Although it has been contended that knowledge management is a function of leadership, the relationship appears to be indirect, ‘filtered’ by relationship quality. Therefore, the following is postulated.

P1 Relationship quality mediates the relationship between leadership and knowledge

management

Knowledge management influences the multidirectional flows of knowledge, which facilitates the sharing of knowledge among employees that can lead to the successful implementation of innovation (Huang & Li, 2009). When employees share their knowledge, new perspectives are generated, which enables the development, acquisition, and transformation of new knowledge that can contribute to innovation (Jimenez-Jimenez & Sanz-Valle, 2011). When knowledge is used effectively, learning is fostered, which improves the uniqueness of the scarce resources available within an organization (Huang & Li, 2009). In the extant literature, this has been identified as an important element in achieving a sustainable competitive advantage (Darroch & McNaughton, 2002). In their research, Nonaka and Takeuchi (1995) consider innovation to be a knowledge-intensive activity that requires input from increasingly scarce internal resources (Jiang & Li, 2009) and is vital to firm success (Caselli, Gati, & Perrini, 2009). In the extant literature, knowledge management has been consistently shown to have a positive impact on innovation (Baker & Sinkua, 1998; Beaver & Prince, 2002; Darroch & McNaughton,

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2002; Garcia-Morales & Ruiz-Moreno, 2007; Johannesen & Olsen, 2011; Kamasak & Bulutar, 2010; Roper, Du, & Love, 2008). From this, the following relationship in the conceptual framework of innovation and performance is suggested.

P2 Knowledge management is positively associated with innovation

According to the customer relationship management literature, relationship quality,

which comprises trust, satisfaction, and commitment, has been shown to enhance long-term performance, measured by customer loyalty (Caceres & Paparoidamis, 2007; Dagger & O’Brien, 2010). Researchers have found that relationship quality influences the innovation-focus of an organization and strengthens performance (Eisingerich et al., 2009; Gronum, Verreyne, & Kastelle, 2012). For innovation to be sustainable, it has been suggested that a satisfying organizational culture that is inclusive to employees is vital (Lyons, Chatham, & Joyce, 2007; Sarros, Cooper, & Santora, 2008). Using a case study of Toyota, Huang and Li (2009) demonstrated that high interconnected networks, which create a strong, motivating culture, where employees are willing to share their knowledge, tend to enhance innovation. From this, relationship quality appears to foster feelings of trust, commitment, and satisfaction among the workforce, which contributes to a comfortable working environment that seems to be a ‘breeding ground’ for creativity. This individual-level creativity can enhance innovation within an organizational context (Gronum et al., 2012). Therefore, the following relationship is suggested.

P3 Relationship quality is positively associated with innovation

In the extant RBV literature, knowledge management has been shown to be vitally

important to developing sustainable competitive advantages through enhanced innovations (Jimenez-Jimenez & Sanz-Valle, 2011). The quality of innovations is directly influenced by the available knowledge within an organization, which subsequently influences performance (Thornhill, 2006). Indeed, knowledge management has been shown to improve innovation and, consequently, performance (Caselli, Gatti, & Perrini, 2009; Darroch & McNaughton, 2002; Gronum et al., 2012; Huang et al., 2012; Jimenez-Jimenez & Sanz-Valle, 2011; Thornhill, 2006). Therefore, the following relationship is suggested.

P4 Knowledge management is positively associated with performance

Organizations that are able to foster innovation throughout their hierarchies and develop

new products and services quickly are capable of capitalizing on opportunities and entering new markets (Huang & Li, 2009). By doing this, organizations are likely to sustain competitive advantages and remain viable in the long-term through enhanced performance (Crossan & Apaydin, 2010; Neely & Hii, 1998). Indeed, innovation is vital and, perhaps, one of the most important dimensions of organizational success (Radas & Bozic, 2009). In the extant literature, a direct and positive relationship between innovation and organizational performance has been found (Aragon-Correa et al., 2007; Bowen, Rostami, & Steel, 2010; Garcia-Morales et al., 2012; Hult et al., 2004; Jiang & Li, 2009; Lyon & Ferrier, 2002; Thornhill, 2006; Veidal & Korneliussen, 2013). Therefore, the following relationship is proposed.

P5 Innovation is positively associated with performance

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IMPLICATIONS AND FUTURE DIRECTIONS

Through the conceptual framework of innovation and performance, the importance of knowledge management, leadership, and relationship quality in the innovation-performance relationship, has been demonstrated. The leaders that are able to foster satisfying cultures and trust through relationship quality are likely to enhance the knowledge that is available within their organizations. This knowledge can be used to stimulate innovations that can ultimately contribute to developing sustainable competitive advantages, which can eventually lead to enhanced performance (Chisholm & Nielson, 2009; Garcia-Morales et al., 2012). In this research, I contribute to theory by not only synthesizing three streams of theory, namely social capital, the resource-based view of the organization, and relationship quality, but also by introducing the relationship quality construct into the innovation literature. Indeed, there are several important implications for managers associated with this research.

Organizations should attempt to establish satisfying organizational cultures through their leaders and, by doing so, attempt to foster relationship quality in their interactions with employees. Leaders can achieve this by creating satisfying and trusting environments, namely by scheduling corporate retreats, paid lunches, one-to-one interactions, and flexible working conditions, that cause employees to perceive their leaders as colleagues as opposed to superiors. To do this, organizations should focus on recruiting leaders that destroy hierarchical layers and attempt to create more personable exchanges with employees. Through this, employees are likely to begin trusting their superiors and become committed to their organization.

Once relationship quality has been established, leaders should encourage employees to share their knowledge by providing them with incentives. Indeed, employees should be rewarded for sharing and making their knowledge available to others. In turn, this knowledge should be stored, easily accessible, updated regularly, and effectively communicated throughout the organization by managers, leaders, and employees. Through this, organizations should be in an improved position to manage the knowledge that is available to them, which can be used to innovate as the right information should be available when needed.

Beyond establishing reward systems for knowledge sharing, employees should be encouraged to innovate. Specifically, employees should be rewarded for not only successful innovations, but also for those innovations that fail. An organizational culture that is based on fostering the willingness to create and innovate, regardless of failure, should be the goal that all organizations strive to attain. Put differently, the fear of failure should be discouraged and employees should be willing to fail and to learn from their failures. Indeed, the negative stigma associated with failure should be eradicated as learning from failure is vital to gaining important knowledge (Cannon & Edmondson, 2005).

By using the conceptual framework of innovation and performance as a theoretical platform, there are several avenues that future researchers can take. Through longitudinal studies, researchers should investigate the importance of relationship quality that is fostered by leadership within young start-ups, established entities, and small-medium enterprises to see how relationship quality can transition as organizations become established. Similar longitudinal studies could be undertaken to investigate the differences in relationship quality among successful organizations compared to those in decline. Researchers should attempt to investigate the effect that relationship quality has on influencing the creation of innovation and knowledge among external partners, namely suppliers and customers. Researchers might endeavour to understand what other factors might be potentially important mediators or moderators in the

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relationship between innovation and performance. Specifically, researchers could investigate firm size, firm age, demographic factors of the workforce, and industry factors. Researchers might also attempt to understand how human resources policies, such as wellness centres, flex time, and flexible working conditions, can create an inclusive environment that can influence relationship quality. Considering that high employee turnover rates tend to have a negative impact on knowledge management within an organization (Jafari, Rezaeenour, Mazdeh, & Hooshmandi, 2011), researchers might consider investigating methods that can be used to encourage employees to remain committed to an organization as opposed to emigrating to rival firms.

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Entrepreneurship Theory and Practice, November 2008, 950-971.

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Technovation, 29, 438-450.

Rauyruen, P. and Miller, K.E. (2007). Relationship quality as a predictor of B2B customer loyalty. Journal of Business Research, 60(1), 21-31.

Rodriguez, G.N. Perez, M.J.S. and Gutierrez, J.A.T. (2007). Interfunctional trust as a determining factor of a new

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Roper, S. Du, J. and Love, J.H. (2008). Modelling the innovation value chain. Research Policy, 37(6/7), 961-977.

Santoro, M.D. and Chakrabarti, A.K. (2001). Firm size and technology centrality in industry-university interactions.

Massachusetts Institute of Technology, Working Paper Series, MIT-IPC-01-001, January 2001, 1-45.

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Academy of Entrepreneurship Journal, Volume 21, Number 2, 2015

Sarros, J.C. Cooper, B.K. and Santora, J.C. (2008). Building a climate for innovation through transformational leadership and organizational culture. Journal of Leadership & Organizational Studies, 15(2), 145-158.

Singh, J.S. Iglesias, O. and Batista-Foguet, J.M. (2012). Does having an ethical brand matter? The influence of

consumer perceived ethicality on trust, affect and loyalty. Journal of Business Ethics, 111, 541-549. Stone, W. Gray, M. and Hughes, J. (2003). Social capital at work how family, friends and civic ties relate to labour

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conceptualization and measurement. European Journal of Marketing, 38(9/10), 1252 – 1271.

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Yli-Renko, H. Autio. E. and Sapienza, H.J. (2001). Social capital, knowledge acquisition, and knowledge

exploitation in young technology-based firms. Strategic Management Journal, 22, 587-613. Stone, W. Gray, M. and Hughes, J. (2003). Social capital at work how family, friends and civic ties relate to labour

market outcomes. Research Paper No., 31, 1-42.

Thornhill, S. (2006). Knowledge, innovation and firm performance in high- and low-technology regimes. Journal of Business Venturing, 21, 687-703.

Ulaga, W. and Eggert, A. (2006). Relationship value and relationship quality: Broadening the nomological network

of business-to-business relationships. European Journal of Marketing, 40(3), 311-329.

Vaccaro, A. Parente, R. and Veloso, F.M. (2010). Knowledge management tools, inter-organizational relationships, innovation and firm performance. Technological Forecasting & Social Change, 77, 1076-1089.

van Auken, H. Madrid-Guijarro, A. and García-Pérez-de-Lema, D. (2008). Innovation and performance in Spanish

manufacturing SMEs. International Journal of Entrepreneurship and Innovation Management, 8(1), 36-57.

van der Panne, G. van Beers, C. and Kleinknecht, A. (2003). Success and failure of innovation: A literature review. International Journal of Innovation Management, 7(3), 1–30.

Veidal, A. and Korneliussen, T. (2013). Entrepreneurial orientation and market orientation as antecedents of

organisational innovation and performance. International Journal of Entrepreneurship and Small Business, 19(2), 234-251.

Page 54

Academy of Entrepreneurship Journal, Volume 21, Number 2, 2015

Woo, K.S. and Ennew, C.T. (2004). Business-to-business relationship quality: An IMP interaction-based

conceptualization and measurement. European Journal of Marketing, 38(9/10), 1252 – 1271.

Yeoh, P.L. (2004). International learning: Antecedents and performance implications among newly internationalizing companies in an exporting context. International Marketing Review, 21(4/5), 511-535.

Yli-Renko, H. Autio. E. and Sapienza, H.J. (2001). Social capital, knowledge acquisition, and knowledge

exploitation in young technology-based firms. Strategic Management Journal, 22, 587-613.

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