The interaction and impact of intellectual capital assets and knowledge management practices on organizational performance

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Master’s Thesis

Janika Luostarinen 2016

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LAPPEENRANTA UNIVERSITY OF TECHNOLOGY School of Business and Management

Knowledge Management and Leadership

Janika Luostarinen

THE INTERACTION AND IMPACT OF INTELLECTUAL CAPITAL ASSETS AND KNOWLEDGE MANAGEMENT PRACTICES ON ORGANIZATIONAL PERFORMANCE

Master’s Thesis 2016

Examiners Professor Aino Kianto

Post-doctoral Researcher Mika Vanhala

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TIIVISTELMÄ

Tekijä Janika Luostarinen

Tutkielman nimi Tietopääoman ja tietojohtamisen käytäntöjen vaikutus organisaation suorituskykyyn

Tiedekunta LUT School of Business and Management Pääaine Tietojohtaminen ja johtajuus

Valmistumisvuosi 2016

Pro gradu –tutkielma Lappeenrannan teknillinen yliopisto 96 sivua, 17 kuvaa, 6 taulukkoa, 7 liitettä

Tarkastajat Professori Aino Kianto, tutkijatohtori Mika Vanhala Hakusanat Tietopääoma, tietojohtaminen, organisaation

suorituskyky, asiakasarvo, arvonluonti, mediaatio

Tämän tutkielman tarkoituksena on selvittää, kuinka tietopääoma ja tietojohtamisen käytännöt vaikuttavat organisaation suorituskykyyn. Organisaation suorituskykyä tarkastellaan arvonluonnin näkökulmasta. Tietopääomaa ja tietojohtamisen käytäntöjä tutkitaan kumpaakin kolmen muuttujan avulla. Tutkielman tavoitteena on testata mediaatiota eli vaikutusten välittymisen tapaa tietojohtamisen kontekstissa.

Soveltuva aineisto oli kerätty tutkimusprojektissa vuonna 2013, ja se oli käytettävissä tässä tutkielmassa. Aineisto analysoitiin kvantitatiivisin menetelmin noudattaen tutkimuskirjallisuudessa esiintyvää mediaation testaamisen mallia.

Tutkielman tulokset tukivat asetettuja hypoteeseja ja mediaatiota. Täydellistä mediaatiota ei löydetty, mutta osittainen mediaatio sai tukea, ja tulokset vaihtelivat riippuen mediaattorista eli välittäjästä.

Tämän tutkimuksen mukaan tietojohtamisen käytännöt ovat vahvempia mediaattoreita kuin tietopääoma. Tutkimustulosten perusteella tietopääoma ja tietojohtamisen käytännöt vaikuttavat arvonluontiin sekä yhdessä että erikseen.

Koska molempien avulla voidaan vaikuttaa organisaation suorituskykyyn ja tuottaa asiakasarvoa, tulisi strategisessa johtamisessa huomioida näiden muuttujien väliset vuorovaikutussuhteet.

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ABSTRACT

Author Janika Luostarinen

Title The Interaction and Impact of Intellectual Capital Assets and Knowledge Management Practices on Organizational Performance

Faculty LUT School of Business and Management

Major Knowledge Management and Leadership

Year 2016

Master’s thesis Lappeenranta University of Technology 96 pages, 17 figures, 6 tables, 7 appendices

Examiners Professor Aino Kianto Post-doctoral Researcher Mika Vanhala

Keywords Intellectual capital, knowledge management,

organizational performance, customer value, value creation, mediation

The purpose of this study is to understand the interaction of intellectual capital assets and knowledge management practices and their impact on organizational performance. Organizational performance is approached from a value creation perspective. Intellectual capital assets and knowledge management practices are studied through three variables each. The objective of the study is to test mediation in a knowledge management context.

There was suitable data collected during a research project in 2013. This data was available to be used in this study. The data was analyzed quantitatively following a causal steps strategy of testing mediation. The results supported the set hypotheses and implicated mediation. Full mediation was not found, but partial mediation was supported, and the results varied depending on the mediator.

According to this study, knowledge management practices are stronger mediators than intellectual capital assets. The results suggest that intellectual capital assets and knowledge management practices have the potential to create value both together and separately. Paying attention to this interaction in strategic management may lead to better organizational performance and higher customer value.

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FOREWORDS

I want to take this opportunity to say thank you to everyone who supported me during the writing of this Master’s thesis. I want to thank all the talented people I have met during the past couple of years studying in Lappeenranta University of Technology, my friends and family, and my colleagues, for understanding, why I could not always be around. Thank you for not forgetting me, when I was studying. This Master’s thesis is result of all of the hard work and the reason I was absent.

The writing of this Master’s thesis was a journey itself, and what a journey it was. It is hard to find the right words to describe, how happy and proud I am to have achieved this. Thank you for all of your the nice words, and good comments. Thank you for all of the times you asked me to repeat again and again, what it was I was studying, and what was my Master’s thesis all about. I will not forget your big smiles, when I explained it. Everytime that happened, it assured me I was on the right path, and reminded me to push forward. Kiitos.

Some say, dreams are only to be dreamed, but to me this was a dream to be made real. I made it!

Espoo 6th October 2016 Janika Luostarinen

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LIST OF FIGURES

Figure 1. Framework of the study

Figure 2. Knowledge management practices moderating the effect of intellectual capital on organizational performance

Figure 3. Intellectual capital assets moderating the effect of knowledge management practices on organizational performance

Figure 4. Hypothesis 1. Intellectual capital assets mediating the effect of knowledge management practices on organizational performance

Figure 5. Hypothesis 2. Knowledge management practices mediating the effect of intellectual capital on organizational performance

Figure 6. Mediation model

Figure 7. Establishing mediation and non-mediation

Figure 8. Histograms on compensation, and training and development

Figure 9. A scatter plot showing the relationship between IC assets and value Figure 10. Leadership mediated by IC assets

Figure 11. Development mediated by IC assets Figure 12. Compensation mediated by IC assets Figure 13. Human capital mediated by KM practices Figure 14. Structural capital mediated by KM practices Figure 15. Relational capital mediated by KM practices Figure 16. Hypothesis 1. Predictors and their mediators Figure 17. Hypothesis 2. Predictors and their mediators

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LIST OF TABLES

Table 1. Multiple perspectives on knowledge in organizations Table 2. Final scales of the study

Table 3. Correlations between the variables Table 4. Cronbach’s Alpha coefficient test

Table 5. Cronbach’s Alpha coefficient test when variables are deleted Table 6. Summary of the direct impacts on organizational performance

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1 INTRODUCTION

This paper studies the relationship between intellectual capital (IC) assets, knowledge management (KM) practices and organizational performance. The aim of the study is to understand, how IC assets and KM practices interact and impact organizational performance and create value through mediation.

1.1 The background of the study

The idea to the study developed after reading a research paper by Kianto, Ritala, Spender and Vanhala (2014). They suggested that the interaction of IC assets and KM practices and their possible mediation effects on organizational performance had not been studied well. Their theoretical paper introduced a model that still lacked empirical testing in a management context. This Master’s thesis attemps to provide that empirical evidence.

Differences in performance are due to different stocks of knowledge and different capabilities in using and developing them (Grant 1996b, 385). That is to say that resources (IC assets) and capabilities (KM practices) have the potential to create sustainable competitive advantage and help the organization perform better (Grant 1996b, 375). IC assets and KM practices are essential in understanding organizational performance and its creation (Kianto et al. 2014, 369). When an organization holds the right kind of IC assets and knows how to manage them, it may create value, and competitive advantage that differentiate the organization from its competitors.

Decarolis and Deeds (1999, 966) continue to suggest that, it is the combination of stocks and flows of knowledge and their management, that are critical to the success of an organization. It is not enough to just have assets and practices, because their potential lies in interaction. Therefore, more research needs to be done to be able to understand these interactions and their impact on organizational

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performance better. The focus of research should be on a broader understanding of how IC assets and KM practices affect organizational performance, and on other than solely an economic perspective (Heisig 2015, 4; Kianto et al. 2014, 369).

In their article Kianto et al. (2014) hypothecized probably the most well known model of mediation and moderation. The model by Baron & Kenny (1986) has been, at the time of writing, very little tested in a knowledge management context, and therefore provides an interesting background on studying IC assets and KM practices impacts on organizational performance. Because organizational performance should be evaluated through both, direct and indirect impacts of variables, this mediator- moderator model fits this study well (Inkinen, Kianto & Vanhala 2015, 433; Decarolis

& Deeds 1999, 965).

1.2 The objectives and the research question of the study

This Master’s thesis aims to enhance the understanding of the interaction of IC assets and KM practices in relation to organizational performance. By analyzing the effects of IC assets and KM practices on each other and on organizational performance, this paper seeks to test the possibility of mediation between the variables.

The research question that this paper addresses is:

How do IC assets and KM practices interact and impact organizational performance?

To answer the research question, empirical testing will be done using SAS statistical software. The analysis follows the steps of testing mediation.

This study has the following objectives: to understand IC assets and KM practices and their impact on organizational performance, and to provide empirically tested results on the set hypotheses (Chapter 2.7 Hypothesis development).

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1.3 Defining concepts

The key concepts of this study are: intellectual capital, knowledge management, value creation, organizational performance and mediation. The broader area of interest of this Master’s thesis covers knowledge management. Knowledge management refers to a process that can be viewed through its means of use. It can be practiced through for example acquiring, creating, storing, integrating, sharing, transferring and applying knowledge (Alavi & Leidner 2001, 114; Zack 1999, 128).

IC assets consist of knowledge-based capital that an organization holds. Kianto et al. (2014, 364) describe IC assets as all of the intangible and knowledge-related resources that an organization is able to use in its value creation processes. In order for an organization to be able to create value from the assets, they have to be managed. KM practices refer to the management of these resources (Kianto et al.

2014, 362).

KM practices can turn knowledge into value (Krogh von 1998, 134). The key potential lies in the application of knowledge (Alavi & Leidner 2001, 115). The value of IC assets and KM practices can be measured by for example in how they create competitiveness, competitive advantage or customer value. Alavi & Leidner (2001, 108) state that knowledge assets and especially the ability to apply and manage knowledge, can create competitive advantage. Grant (1996, 116-117) and Zack (1999, 134) find a connection between competitive advantage and organizational capability, implying that what differentiates an organization is its ability to access, apply and integrate knowledge assets. That being said IC assets and KM practices may have a positive impact on organizational performance. Organizational performance stands for the outcome of a value creation process (Kianto et al 2014, 366).

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Figure 1. Framework of the study

The framework of the study is shown in Figure 1. It shows the theoretical foundations of this study being based on resource-based view of the firm and knowledge-based view of the firm. The relationships between IC assets and KM practices and their impact on organizational performance are studied using a mediation model.

Mediation refers to a situation where a causal effect is completely explained by an intervening variable (Shrout & Bolger 2002, 422). Partial mediation means that the effect is only partially explained by an intervening variable. The empirical research follows the steps of studying mediation. What mediation means in this Master’s thesis, is that IC assets and KM practices take turns as intervening variables in a mediation model, and their impacts on organizational performance are studied.

In this Master’s thesis, organizational performance is approached from a (customer) value creation perspective. Customer value is expected to create competitive

Resource-based view of the firm

Knowledge-based view of the firm

Intellectual capital (IC assets)

Knowledge management (KM practices)

Organizational performance (value creation, competitive advantage)

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advantage. Other forms of evaluating organizational performance have been excluded from this study.

A more through out look at the key concepts of this study is carried out by examining previous research papers. This literature review is opened up in Chapter 2 Theoretical background.

1.4 The structure of the study

This paper is divided into chapters. In the next chapter, a theoretical background will be presented. The literature review has been gathered using managerial journal articles as the primary source of material. The management literature addressed in the theoretical chapter handles the subjects of intellectual capital assets and knowledge management practices and their influence on organizational performance, as well as mediation. The question of value creation is addressed in relation to IC assets, KM practices, competitive advantage and organizational performance. The mediation theories are taken a look at before turning the attention to developing and testing of the hypotheses.

The empirical research is carried out using quantitative methods. After carefully analyzing the data collected by a research group, the results are discussed in relation to theory. The final chapter paints an overall picture of the findings. The implications of the study are also discussed and possible future research themes suggested in the final chapter.

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2 THEORETICAL BACKGROUND

According to Grant (1996a, 110) the object of strategic management is to explain organizational performance and create competitive advantage. In order to achieve these objectives, managers needs to have a clear understanding of, where the organization is going, which are the most important resources an organization holds, and what kind of resources are needed to maintain and generate competitive advantage also in the future. When these assets are defined well, it is possible to manage them.

Knowledge of an organization consists of competencies of individuals and the structures of organizing and coordinating the relationships between them. These principles of coordinating competencies generate the capabilities of a firm. (Zander

& Kogut 1995, 77.) Focusing strategically on internal resources and capabilities is worthwhile, because they may provide more sustainable competitive advantage than, for example focusing purely on a market positioning strategy (Zack 1999, 127).

2.1 Nature of knowledge

Knowledge can be viewed from multiple perspectives. The classifications of knowledge seem never-ending, but some of the most well-known are presented in Table 1.

According to Alavi & Leidner (2001, 109) knowledge can be a state of mind, an object, a process, having access to information or a capability. Kianto et al. (2014, 370) divide knowledge in to an asset and a capability. Knowledge as an object means assets hold by an organization, where as knowledge as a capability potentially influences KM practices. The challenge is, that whichever perspective one takes, it promotes a very different knowledge management strategy.

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Table 1. Multiple perspectives on knowledge in organizations (Alavi & Leidner 2001, Brown & Duguid 2001, Decarolis & Deeds 1999, Zack 1999, Grant 1996a, Kogut &

Zander 1992, Walsh & Ungson 1991).

Kogut & Zander (1992, 388) classify knowledge as information and know-how. That is the competence of employees and the management of relationships. In relation to this study, these competences are IC assets, and structuring of them are KM practices.

Knowledge turns into information, once it is articulated, and information turns into knowledge when it is processed in the minds of individuals (Alavi & Leidner 2001, 109). That way, knowledge can be about knowing how or tacit knowledge; and knowing what, knowing about or explicit knowledge (Grant 1996a, 112; Kogut &

Zander 1992, 386). Tacit knowledge is stored and owned by individuals, where as explicit knowledge can be descibed as common and be written down (Grant 1996b, 377). Explicit knowledge can be communicated, where as tacit knowledge can be shown and observed by its’ application in practice (Kogut & Zander 1992, 386-387).

Especially tacit knowledge lacks appropriability, because it can only be transferred by its’ application (Grant 1996a, 112). Nonaka & Takeuchi (1995) continue to explain, how explicit and tacit knowledge transform and generate new knowledge in their famous SECI-model. SECI-model is a never-ending swirl where tacit knowledge transacts among people (socialization), becomes explicit (externalization), is linked to existing knowledge (combination) and turns again to

Location Can be Found in

within an organization a state of mind individual members outside of an organization an object roles and structures between organizations a process procedures and practices

having access to information software and equipment a capability documents and databases

static / dynamic organizational culture and behavior sticky / leaky physical structure of the workplace explicit / tacit networks

a resource stocks / flows

capital

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tacit knowledge (internalization). Nonaka & Takeuchi’s model can be interpreted to treat knowledge as an object (Pöyhönen 2004, 35).

Besides knowledge being tacit or explicit, it can also be described sticky and leaky.

This means, that sometimes knowledge and new innovations leak out to competitors, but are awfully stuck and unable to move productively within the organization (Brown & Duguid 2001, 199). Because knowledge is also situation- based, it impacts the decision-making processes of a company (Grant 1996a, 112).

Kianto et al. (2014, 364), divide knowledge to static capital and dynamic assets that can be managed. When knowledge is viewed as a capital or a resource, it has the potential to create value, when it is managed right. Managing can be seen as knowledge to act as a mediator in value creation processes. (Kianto et al. 2014, 369.) Management puts the static assets into motion.

Depending on the view taken on knowledge, knowledge management practices are focused differently. If knowledge is viewed as data, knowledge management focuses on its potential. Knowledge as a state of mind means to understand, and its management intends to enhance it. When knowledge is conceptualized as an object to be stored, it needs management practices that help in building these kind of knowledge stocks. If knowledge is viewed as a process, management focuses on applying, sharing and creating expertise. Knowledge may also mean access to information, which needs management practices that enhance the access.

Knowledge as a capability, refers to its potential to influence action, and its management focuses on building core competencies and managing them strategically. (Alavi & Leidner 2001, 111.)

Knowledge is the product of ongoing practices an processes of an organization that are embedded in its social and physical structures (Pentland 1995, 5). External sources of knowledge may be both personal and professional networks and relations, but also official agencies, universities or publications (Zack 1999, 138).

Because of the social nature of knowledge, it is very much grounded in its

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development and use (Pöyhönen 2004, 37). Perceptions of knowledge differ and make variation in the definition of knowledge possible.

2.2 The Resource-based view of the firm

There are two main views on knowledge, and how it contributes to organizational performance: the resource-based view of the firm (Barney 1991) and the knowledge-based view of the firm (Grant 1996; Kogut & Zander 1992). What is similar in these views, is that they both find strengths of an organization to come from within it (Andreeva & Kianto 2012, 619). Both of the views state, that the most important strategic assets of an organization are based on knowledge (intangible assets) (Komnenic & Pokrajčić 2012, 107).

The resource-based view of the firm sees organizations as full of resources and capabilities, and studies how these explain provoking of sustainable competitive advantage (Grant 1996a, 110). Resources can be anything. They can be tangible or intangible, and defined as practically anything that an organization manages:

assets, capabilities, processes, firm attributes, information and knowledge (Lerro, Linzalone & Schiuma 2014, 354; Cheng, Lin, Hsiao & Lin 2010, 435). They can be characterized as inputs, such as machinery and equipment, brand names, patents, employment of talent, skills, capital of individuals, and ﬁnancing that contribute to production processes of an organization. (Cheng et al. 2010, 435; Wernerfelt 1984, 172.) What is in common with all of them, is that in order for an resource to contribute in creating competitive advantage, it needs to be valuable, rare, imperfectly imitable and unique, and operationalizable by the company (Barney 1991, 105-106).

In order to develop competitive advantage, organizations must hold strategically right resources and capabilities, that are unique and better than those of their competitors (Cheng et al. 2010, 434). Because resources can be basically anything, they can prove to be either a strength or a weakness to an organization (Wernerfelt 1984, 172). An organization needs to be one-step ahead in the game to be able to

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have the right kind of assets in the changing environment. It is a matter of having a right set of strategic assets and knowing, how to acquire, hold and use them to develop competitive advantage (Cheng et al. 2010, 434). Therefore, it is the management and development of these resources and capabilities that will possibly add to maximizing value (DeCarolis & Deeds 1999, 953; Grant 1996a, 110). An organization must know, how to use its resources in creating competitive advantage (Cheng et al. 2010, 434).

Intellectual capital assets are in a key position to drive organizational performance, create value and sustain competitive advantage. They have become more important in value creation than tangible, physical assets (Wu, Tsai, Cheng & Lai 2006, 531.) Because physical assets (such as equipment and technology) can be more easily imitated and substituted than intangible assets, intellectual capital assets are viewed as strategic assets of an organization. These strategic assets are the ones that have the potential to turn into competitive advantage (Barney 1991, 113).

When an organization holds the right components of intellectual capital, it will potentially create value and anticipate future income (Hermans & Kauranen, 2005, 184). Organizations should use their resources and capabilities strategically when positioning theirselves in the market (Zack 1999, 127; Barney 1991, 105-106).

According to the resource-based view of the firm, sustainable competitive advantage can be gained, when exploiting internal resources (or opportunities) or neutralizing threats (Barney 1991, 106). Organizations may gain competitive advantage and superior performance, when they have the ability to learn, accumulate and hold the right set of strategic assets and knowledge, and know how to use it (Zack 1999, 134). As this theoretical discussion shows, the interaction of the strategically, right set of assets and knowing how to manage them, may lead to a better market position and creates value.

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2.3 The Knowledge-based view of the firm

The knowledge-based view of the firm is an extension of the resource-based view of the firm. It focuses on knowledge as the most strategically important resource of an organization. (Grant 1996a, 110.) The knowledge-based view of the firm explains the relationship between capabilities and organizational performance (Decarolis &

Deeds 1999, 953). It studies organizational structure and the role of management in generating performance (Grant 1996a, 110).

According to Zander & Kogut (1995, 77) the capabilities of a firm are generated by the organizing of both individual and functional competencies, and the coordination and structure of relationships. Different knowledge bases and capabilities (intellectual capital assets or stocks) and the ability to access external knowledge (flows), create differencies between organizations and their performance over time (Dierickx & Cool 1989, 9). Stocks of knowledge are organization’s internal knowledge assets that accumulate over time, and flows of knowledge are external knowledge streams, that may develop into stocks of knowledge (Decarolis & Deeds 1999, 954). Knowledge of a firm enables owning options on future developments.

Therefore these stocks are socially constructed and lie in the structures of human resources (Kogut & Zander 1992, 385). According to Decarolis & Deeds (1999, 954) reputation, dealer loyalties and R&D capabilities are good examples of stocks of assets, that have accumulated over time.

The knowledge-based view of the ﬁrm sees knowledge as the single most important competitive resource of an organization (Tovstiga & Tulugurova 2007, 697). In dynamic environments, the accumulation of knowledge can reduce risks and uncertainties (Liebeskind 1996). In the ever-changing environment, success is dependent on the absorptive capacity of individuals and organizations (Cohen &

Levinthal 1990).

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Organizational performance depends on both the stocks of organizational knowledge and the access to flows of knowledge. Decarolis & Deeds (1999, 955) suggest that these knowledge flows can be captured and used in a specific geographical location: a "hot spot"; through creating alliances, or internally with research and development (R&D) processes. The more relevant knowledge an organization is able to accumulate, internalize and put to use, the more likely it will succeed in the market. This knowledge and its’ management influence organizational performance (Kogut & Zander 1992, 384).

2.4 Intellectual capital

A wide consensus lacks when defining intellectual capital (IC). Perhaps the most well-known definition of IC is developed by a Swedish company Skandia, stating that IC is “the possession of knowledge, applied experience, organizational technology, customer relationships, and professional skills” (Clarke, Seng & Whiting 2011, 506). Edvinsson & Sullivan (1996, 357-358) define intellectual capital as a stock of organized knowledge that the organization can use productively, and that can be converted into value. IC assets also have the potential to impact organizational performance and create competitive advantage (Wu et al. 2006, 531).

Although a wide consensus lacks in defining intellectual capital, one of the most widely accepted categorizations is three-dimensional: human capital, structural capital and relational capital. Relational capital may also be called customer capital that lies in relationships (Sydler, Haefliger & Pruksa (2013). Intellectual capital is also refered to as intangible assets in research literature.

Human capital is described as the collective capability of employees as well as their individual skills and competencies that have the potential to generate value to the organization (Hermans & Kauranen 2005, 173). Human capital has been proved to have positive impacts on organizational performance (Cheng et al. 2010, 437-438).

The value of human capital is as well in finding problems and asking questions, as

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it is in solving dilemmas (Käpylä, Kujansivu & Lönnqvist 2012, 350). Sydler et al.

(2013) combine these skills and competencies as the tacit knowledge of an organization. For example Bontis (1998, 71) and Käpylä et al. (2012, 350) point out that having intellectual employees is not enough, and that an organization needs to provide the right kind of supportive structure, and nurturing and utilizing of these individual skills too. If this is done successfully, it may explain the indirect path from human capital to performance (Bontis 1998, 71). This indirect path may be explained by mediation that is studied in this Master’s thesis.

When Hermans & Kauranen (2005, 173) describe structural capital as the ability to organize resources in a useful way, Sydler et al. (2013) see structural capital as concrete results of this organizing: patents, licenses and trademarks. This can also be called the innovation capital of an organization (Cheng et al. 2010, 437-438).

Human capital can leave the company, when competent employees leave, but structural capital stays in the company even when an employee leaves (Sydler et al. 2013). So to say, structural capital is integrated in the organization and its technology.

Relational capital consists of external networks (Hermans & Kauranen 2005, 173).

Relational capital is constructed between people and lies in their relationships (Sydler et al. 2013).

Intellectual capital is accumulated and captured knowledge-based capital that is possessed, and used by an organization (Wu et al. 2006, 532). This definition holds the thought of the importance of IC to organizational performance. If IC was not captured by an organization, it could not be used. Even if it was captured, but the organization was not capable of utilizing it, it would not build up to produce competitive advantage. KM practices represent the tools that allow an organization to maintain and grow its knowledge assets (Marr et al. 2003, 773). These assets may produce a long-term, sustainable, competitive advantage. However, it is not only the assets, but combining them successfully to create new knowledge, that

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have the potential to create value. (Alavi & Leidner 2001, 108; Decarolis & Deeds 1999, 953.) Therefore, it is essential that organizations classify and quantify their intangible assets and evaluate their competitiveness (Wu et al. 2006, 532).

Competitiveness can be enhanced, when intellectual capital is seen as strategic resources of an organization (Lerro et al. 2014, 353).

To sum up, intellectual capital consists of individual competencies, internal structures and external structures. Intellectual capital can be divided into human capital, relational capital and structural capital. When these three components are well-balanced and function together, the company may be able to create value from its business activities. (Hermans & Kauranen 2005, 173.) So to say, intellectual capital has the potential to create competitive advantage (Lerro et al. 2014, 350). If the level of intellectual capital is high, it will create a need to organize and manage it (Kianto et al. 2014, 369). This kind of organizing can be provided through efficient knowledge management practices (Hermans & Kauranen 2005, 173). That in turn impacts performance over time (Kianto et al. 2014, 369).

2.5 Knowledge management

Knowledge management (KM) is defined as all of the practices managers need to do, to mobilize collective and individual knowledge resources held by the members of the organization, to help the organization compete (Krogh von 1998, 133). This means assessing current knowledge and the need for future knowledge, and then finding out a way to bridge the gap (Inkinen et al. 2015, 446).

KM is about making choices based on knowledge, and deciding on the right practices that help the organization compete in the changing environment (March 1991, 72). KM prepares organizations to face the challenges and responsing better to environmental turbulence (Sher & Lee 2004, 941). Sher & Lee (2004, 935) find it important, that knowledge management systems are efficient, functional and enable knowledge to flow. The flow of knowledge then creates and maintains dynamic

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capabilities, and influences both productivity and business excellence (performance). KM is found to be important for example to innovation, executive decision-making, and organizational adaptability and renewal (Earl 2001, 215).

Knowledge management is practiced through the processes of creating, storing, transferring and applying knowledge (Alavi & Leidner 2001, 114). It means dynamic and continuous processes and practices that are embedded in individuals, groups and structures that combine technical and human aspects (Andreeva & Kianto 2012, 618; Alavi & Leidner 2001, 123). These processes enable organizations to acquire and generate new knowledge and support the sharing of it (Schiuma 2012, 518). If knowledge is to be generated, it requires careful management, time, effort and collaboration skills (Davenport & Prusak 1998, 270). The same was found by Cohen

& Olsen (2015, 1179), among many others, who state that KM practices should be focused on motivating and strengthening of employee commitment, in order to create an atmosphere, where employees are willing to share their knowledge.

Knowledge sharing then impacts performance. These KM practices are essential for knowledge management to be effective (Alavi & Leidner 2001, 124). KM is, so to say, the motor that keeps IC in organizations, and KM practices are intended to improve the generation and application of IC (Marr, Gupta, Pike & Roos 2003, 773).

Zack, McQueen & Singh (2009, 394) describe knowledge management practices as knowledge prosessing behaviors, management practices and organizational culture. Andreeva & Kianto (2012, 620), as well as Inkinen et al. (2015, 433) describe knowledge management practices as a set of controlled management activities that seek to deliver value from resources and knowledge assets, and improve the effectiveness and efficiency of managing knowledge in an organization.

Zack et al. (2009, 394) have defined knowledge management practices as observable organizational activities. They divide these activities into four organizational performance -related practices:

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1) the ability to locate and share existing knowledge, 2) the ability to experiment and create new knowledge,

3) a culture that encourages knowledge creation and sharing, 4) a regard for the strategic value of knowledge and learning.

Heisig (2009, 11) has also looked at knowledge management practices through four critical success factors: 1) culture, people and leadership (human); 2) processes and structures (organization); 3) infrastructure and applications (technology) and 4) strategy, goals, and measurement (management processes). In their study, Inkinen et al. (2015, 433-434) divide knowledge management practices into ten categories:

1) supervisory work, 2) knowledge protection, 3) strategic knowledge management and competence, 4) learning mechanisms, 5) information technology practices, 6) work organization, and human resource management practices of 7) recruiting, 8) training and development, 9) performance appraisal, and 10) compensation practices. The variation in definitions and descriptions of KM practices (Zack et al.

2009; Heisig 2009; Inkinen et al. 2015, and many more alike), provide evidence that KM practices can be approached through multiple perspectives. The subject is still fairly new, and no clear set of definition has yet risen to be the standard.

Schiuma & Lerro (2008, 5) describe IC management as strategic knowledge management, that is supported by the resource-based view of the firm, and the knowledge-based view of the firm. IC management can be viewed from different perspectives. The strategic perspective pinpoints the importance of linking IC management initiatives to strategic objectives of the organization (Schiuma & Lerro 2008, 5). The managerial perspective concentrates on knowledge development and management, and knowledge assessment. The operational perspective includes IC management activities such as teamwork, benchmarking and communities of practice (Schiuma & Lerro 2008, 6.) Knowledge management practices ought to be selected so that, they support the strategy of an organization and lead towards the desired performance outcomes (Cohen & Olsen 2015, 1186). If management

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systems fail, or are inefficient, present or acquired knowledge may not create competitive advantage (Sher & Lee 2004, 935). These links to strategic management ought to be highlighted more.

Davenport & Prusak (1998, 268) emphasize, that managing knowledge includes managing a process and a thing simultaneously. Managing IC assets requires identifying what and where are the IC assets that drive organizational performance and using them accordingly, making value creation processes visible, measuring performance and reporting it. When value creation processes are identified, it is possible to evaluate and measure them and their impact on organizational performance. (Marr et al. 2003, 772.)

2.6 Knowledge-based perspective on organizational performance

The existence of organizations is related to their ability to create, develop and transfer capabilities and resources (Zander & Kogut 1995, 77). Organizational capability is the ability of an organization to integrate the knowledge of its members into productive action (Grant 1996b, 375). When skills are defined as the competence of individuals, the capabilities of an organization are due to its organizing principles (Zander & Kogut 1995, 77).

Käpylä et al. (2012, 344) view organizational performance in social, economical and ecological terms. Kanter & Brinkerhoff (1981, 322) divide measuring performance to consist of goals and their achievement, functional management, processes and structures, and the environmental adaptability. These aspects relate to strategic management. So to say, measuring organizational performance requires that strategic objectives of an organization are forward-looking, defined clearly and realistic for them to create value.

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2.6.1 Value creation dynamics

Value can be created through continuous improvements in performance. Improving performance requires developing, implementing and managing processes and competencies based on knowledge assets more effectively and efficiently (Lerro et al. 2014, 351-352; Schiuma & Lerro 2008, 4.) Organizations invest their scarce resources only if that improves their value creation capacity (Schiuma 2012, 515).

Grant (1996, 112) reminds that knowledge creation is done by individuals, and organizations can only try to apply this knowledge in their production. Organizations must, in this case, give incentives and show direction in order to be able to use their employees’ knowledge base in value creation (Grant 1996, 113). Value can be created through combining multiple individuals’ specialized knowledge and putting it into use, because no one is an expert in all fields (Grant 1996a, 112; Grant 1996b, 377).

Kogut & Zander (1992, 387) imply, that the value of resources can be hard to define, because of their interconnected nature. This means, that different combinations of resources, or assets, have the potential to create different levels of value, or more value. Value can be created when resources and capabilities are combined better than competitors (Zack 1999, 128). New knowledge can be integrated with existing knowledge, and more valuable knowledge created that way. The more knowledge is used, the more valuable it becomes. That is to say that knowledge creates cumulative and increasing returns. (Zack 1999, 129.) Intellectual capital and especially knowledge, can therefore be considered the most important strategic resource (Zack 1999, 128, 130).

Knowledge-based view of the firm sees knowledge as the primary source of value creation (Grant 1996a, 112). Value is created and increasingly also explained by intellectual capital (Hermans & Kauranen 2005, 171). The most important knowledge is strategically valuable. Because the value of knowledge is space- and

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time-specific, the value depends on assumptions, judgments and objectives of the society or the environment (Käpylä et al. 2012, 344). The ability to use knowledge in value creation processes is due to the absorptive capacity of an organization and its members (Cohen & Levinthal 1990, 128).

According to the asset approach, intellectual capital assets are seen as valuable stocks, where as the ability and capability to develop and use these stocks is a flow that has the potential to create competitive advantage. These knowledge management practices and their impacts are addressed in the knowledge-based view of the firm and dynamic capability approaches. (Pöyhönen 2004, 109.) Knowledge management can create value through opening up opportunities and by helping the organization compete (Zack 1999, 128, 130). According to Lerro, Iacobone & Schiuma (2012, 564) creativity, imagination, energy and passion represent the new competitive, value-creating factors in business. These variables have not been addressed in this Master’s thesis particularly, but they are part of IC.

To create value and competitiveness, more and more utilizing of human capital is required, because knowledge assets present the key drivers of value creation.

When these assets are managed properly, the effects are seen in organizational behavior and strategic planning, and in value creation dynamics. (Lerro et al. 2012, 567; Marr, Schiuma & Neely 2004, 322.)

2.6.2 Competitiveness and competitive advantage

As many authors seem to suggest, it is not knowledge on its own that creates competitive advantage, but the ability to integrate it. Many researchers have also suggested that intangible assets are the main source of competitive advantage (Conner & Prahalad 1996; Grant 1996; Barney 1991). The management of these assets may almost without a benefit of doubt, have a signiﬁcant positive effect on organizational performance and competitive advantage (Schiuma & Lerro 2008, 8;

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Wu et al. 2006, 541). Improvements in performance may be due to the combined effect of IC assets and KM practices.

Competitive advantage is built on relationships, which create new knowledge.

Resources and organizational capabilities are the two most important factors affecting the creation of sustainable competitive advantage (Grant 1996b, 375).

Tovstiga & Tulugurova (2007, 697) found in their literature review, that managing and developing the flows of knowledge, will more likely create competitive advantage, than just having stocks of it.

Organization’s ability to learn, accumulate knowledge and use it, are skills themselves that might produce strategic advantage (Zack 1999, 134). Cohen &

Levinthal (1990) labeled such an ability absorptive capacity. They argue that absorptive capacity accumulates and builds on prior knowledge, and that way drives innovations and the recognizing of the value of new knowledge. It is more likely to occur naturally, when the knowledge, that an organization wishes to have, is closely linked to its current knowledge base (Cohen & Levinthal 1990, 150). A knowledge- based competitive advantage is thought to be sustainable because the more an organization knows, the more it can learn (Zack 1999, 128). When the perspective of Tovstiga & Tulugurova (2007) is brought to the discussion, it can be found that pure accumulation of knowledge is not enough to create competitive advantage, and it is actually the flows of knowledge that build new knowledge and innovations.

Cohen & Levinthal (1990, 139) state that, it is the degree to which new knowledge enhances processes and products that leads to improved performance and profit.

Barney (1991, 105-106) has defined resources that have the potential to create competitive advantage as valuable, rare, inimitable and non-substitutable. These kinds of resources enable strategic planning that improve efficiency and effectiveness. Rare resources are those that are not used widely by competitors, and imperfectly imitable resources are difficult to duplicate. When a resource is non- substitutable, it cannot be replaced by a similar resource in the market. Therefore

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knowledge-based resources can prove to be very valuable to an organization.

Although people are replaceable, their knowledge is not. Therefore a competitive advantage is more and more a knowledge-based advantage (Ellsworth 2002, 11), and knowledge the most valuable strategic resource (Zack 1999, 125).

Competitiveness means an ability of the company to satisfy customers needs and to incorporate value into products and services provided (Schiuma & Lerro 2008, 3).

For example patents, copyrights and technological capabilities can be the kind of knowledge that gives an organization competitive advantage (Grant 1996b, 380).

When knowledge management practices are applied effectively, organization can differentiate its goods and services better than competitors (Collings, Worthington, Reyes & Romero 2010, 950). Overall, competitiveness means that an organization must be able to provide, what the market needs, and more efficiently than competitors do (Grant 1996b, 379-380). In addition to these rather technical views on customer value, long-term relationships with customers and superior knowledge on each customer’s needs are hard to replace, at least in a short period of time.

2.6.3 Measuring organizational performance

Companies have traditionally measured their performance in economic terms (return on assets (ROA), return on equity (ROE), revenue or sales growth, productivity, profit margin), which has easily lead to underestimating the value of the company (Lerro et al. 2012, 564; Clarke et al. 2011, 514; Decarolis & Deeds 1999, 960). The economic value does not capture all relevant information about the company’s value.

The market value can be higher than the economic value of an organization due to IC assets (Dumay 2009, 192; Brennan & Connell 2000, 206). The problem with reporting the impact of IC assets on organizational performance is that they are difficult to observe or measure in financial terms (Lerro et al. 2012, 566). Kianto et al. (2014, 369) have also problematized this. IC assets are only randomly reported

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on financial market value calculations. Some examples of the measures of IC in these reports are goodwill and brand recognition (Cheng et al. 2010, 435; Wu et al.

2006, 543).

According to Lerro et al. (2014, 351) it is difficult to assess the impacts of intellectual capital assets and their management on organizational performance. For example, Lee & Choi (2000) list intellectual capital as an individual measure of organizational performance along with financial figures, balanced scorecard, and tangibles and intangibles. Performance-based measures can however be used in measuring tacit knowledge, that can otherwise be hard to articulate (Argote & Ingram 2000, 152).

Andreeva & Kianto (2012, 618) found different ways of measuring and interpreting performance from previous research: innovativeness, product and employee improvement, product leadership, customer intimacy and operational excellence, and competitive position. Organizational performance can also be measured in other knowledge management practices non-financial intermediate outcomes such as coordination, responsiveness, ability to identify market opportunities, speed to market and (process) efficiency (Zack et al. 2009, 393). Performance may also be viewed as adaptation to the changing environment (Lumijärvi 2009, 30).

Komnenic & Pokrajčić (2012, 108) suggest, that performance should be seen from the stakeholders’ perspective, instead of the shareholders’ perspectice. According to the latter, performance is based on accounting profits, when the stakeholders’

perspective sees organizational performance as the total wealth generated.

Lumijärvi (2009, 29) adds another interesting view on measuring organizational performance, suggesting that measuring could be based on evaluating goals and their achievement, or system models, that measure the impacts on the environment or on the expectations of the customers. These views support the idea of reporting more than the financial performance.

Vishnu & Kumar Gupta (2014, 84) and Lerro et al. (2012, 567) divide the purpose of assessing IC and KM to two: managing value creation dynamics of an

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organization and reporting the value generated. The dynamic nature of IC assets cannot be read directly from performance figures, because the measures usually represent a situation in a certain point in time. Knowledge assets evolve and their importance may change. This calls for a need for systematic collection of information. Performance should be measured continuously in order to be able to see, how managerial decisions impact performance, for example in three to five years. (Lerro et al. 2012, 567; Lumijärvi 2009, 27.) It is also easier to highlight the importance of intellectual capital assets and knowledge management practices influence on organization’s success, when the measures are defined well (Lerro et al. 2014, 352). When the traditional economic figures are replaced with indicators such as knowledge creation, sharing, and utilization, the employees will more likely engage with those activities and improve the entire company’s performance.

The measuring of IC assets and KM practices in relation to this study is explained in Chapter 3. The exact questions of the survey can be found in Appendix 1.

2.7 Hypothesis development

Research typically addresses the questions of, if there is an effect, and to what extent is the effect direct or indirect (Iacobucci, Saldanha & Deng 2007, 140). If an effect is supported by the analysis, the next questions are usually why and how that effect occurs.

The discussion of IC assets and KM practices impact on organizational performance is well addressed in research literature. According to previous research, IC assets and KM practices both influence performance outcomes. Zack et al. (2009, 392- 393) found in their study, that knowledge management practices have a direct impact on organizational performance. Organizational performance is then directly related to financial performance. Knowledge management practices are also directly related to intermediate measures (for example product leadership or operational excellence) of organizational performance, and these again to financial

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performance. There might also be mediation and moderation effects (Inkinen et al.

2015, 445).

2.7.1 Mediation and setting the hypotheses

Baron & Kenny (1986) introduced, now a highly cited, and well-known mediator- moderator variable distinction model, the causal steps strategy, that is helpful in analyzing the relationships of the variables and their effects. The effecting factors can be studied in detail from the magnitude of effect (moderation) and mechanisms that produce the effect (mediation) point of view (Judd, Kenny & McClelland 2001, 115). The difference between moderation and mediation is explained well by Frazier, Tix & Barron (2004, 116) who cite Baron & Kenny (1986), Holmbeck (1997) and James & Brett (1984): moderators (Figures 2. and 3.) address the questions of

‘when’ and ‘for whom’, and mediators (Figures 4. and 5.) ask ‘how’ and ‘why’ the variables explain the dependent variable. Mediation means that there is an intervening mechanism affecting the outcome. Moderation means that different factors affect the magnitude of the effect on the outcome. (Muller, Judd & Yzerbyt 2005, 852.) Mediator variables can function in different roles, whereas moderators always function as independent variables (Baron & Kenny 1986, 1174). The same variable can be both a mediator and a moderator (Judd et al. 2001, 115).

The mediator-moderator model offers this study four possible ways that IC assets and KM practices interaction and impact on organizational performance may be studied (Figures 2. to 5.). The research question of this Master’s thesis asks How?

How do IC assets and KM practices interact and impact organizational performance? Because mediation analyses seek to answer, how are the predictor variables and the outcome linked, the research question can be answered using Baron & Kenny’s mediation analysis (Frazier et al. 2004, 126). For this reason, the moderation models (figures 2. and 3.) were excluded from this study. Further, testing moderation would have required at least two different data collections. The data

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used in this Master’s thesis was collected at one point in time, which supports the use of a mediation analysis.

Figure 2. Knowledge management practices moderating the effect of intellectual capital on organizational performance.

Figure 3. Intellectual capital assets moderating the effect of knowledge management practices on organizational performance.

Figure 4. Hypothesis 1. Intellectual capital assets mediating the effect of knowledge management practices on organizational performance.

Figure 5. Hypothesis 2. Knowledge management practices mediating the effect of intellectual capital on organizational performance.

Intellectual capital assets

Organizational performance Knowledge management

practices

Knowledge management practices

Organizational performance

Knowledge management

practices

Knowledge management

practices

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Figures 4. and 5. show, how a mediation model is structured. In Figure 4. IC assets function as a mediator, and in Figure 5. it is the KM practices that mediate and account for variations in organizational performance. Mediation is supported, when in Figure 4. KM practices significantly account for variations in IC assets, and IC assets significantly account for variations in organizational performance. The significance of KM practices on organizational performance loses its significance because of mediation. (Baron & Kenny 1986, 1176.) In Figure 5. the predictor variables are vice versa.

Figures 4. and 5. represent the hypotheses of this paper, and their theoretical foundations in relation to previous research literature are argued next. The more precise measures used in this research are presented in Chapter 3.3.

2.7.2 Theoretical foundations for the hypotheses

Performance differences are thought to be caused by different stocks of knowledge in organizations and their differing capabilities to use and develop that knowledge (Pöyhönen 2004, 77). Decarolis & Deeds (1999, 965-966) found that, it is the KM practices (management of stocks and flows of knowledge), that critically influence the overall organizational performance. However, they claim that IC assets’ (stocks) impact on organizational performance is greater than that of flows’ impact. This relationship is also discussed by for example Tosey (2008, 458), who describes the situation being common. According to him, it is assumed that organizational performance changes, when new knowledge and skills are adopted to the company.

However, the interaction of codified knowledge and knowledge management, affects performance more than they would separately (Cohen & Olsen 2015, 1186).

These interactions are an interest of this Master’s thesis. Is it the IC assets that impact KM practices of KM practices that impact IC assets? In the light of previous research, both of these hypothesized relationships ought to be supported.

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Because competition for the most talented people and their knowledge is hard, and might not produce the kind of competitive advantage as anticipated, organizations should focus on developing their knowledge management practices. These kind of practices are aimed at improving and getting more out of in-house human capital, and include for example compensation, training and development programmes, as well as functional information systems. (Inkinen et al. 2015, 445.) The current knowledge of an organization influences the decisions it makes concerning future developments. The decisions are to be made in which capabilities to maintain and develop further (Kogut & Zander 1992, 394).

Cohen & Olsen (2015, 1186) suggest that knowledge management practices should be directed in accordance with strategic objectives of the company, in order to achieve the desired perfomance outcomes. An analysis of firms potential of higher organizational performance should be carried out by studying its’ skills and capabilities rather than analyzing its’ environment. This is due to the fact that the tools used to analyze the environment are usually publicly available and therefore also used by the competitors. (Barney 1986, 1231-1238.)

Hypothesis one (Figure 4.) suggests that effective KM practices create new skills or levels of IC assets that effect organizational performance and may cause higher customer value over time. What Kianto et al. (2014, 368) remarked is that hypothesis 1 perhaps implies a transformation of dynamic KM practices to more static IC assets. Active management practices are turned into IC asset stocks when utilized. For example Daud & Yusoff (2011, 2615) found that IC assets (human, structural and social capital) partially mediated the impact of KM processes on organizational performance, and Yang & Lin (2009, 1976) that IC assets (human, relational and organizational capital) mediated the relationship between HRM practices and organizational performance. Lumijärvi (2009, 109-111) suggests that the impact of leadership on organizational performance is linked to work communities characteristics. The characteristics create higher organizational performance when strategic human resources management (SHRM) support them,

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but the characteristics do impact performance even when they are not supported by the management.

Hypothesis two (Figure 5.) suggests that the level of IC assets causes a need to establish certain types of KM practices that in turn increase organizational performance. Only a few articles were found that were at least somewhat linked to this hypothesis. Hsu and Sabherwal (2011, 639) found that KM capabilities of knowledge enhancement and utilization mediate the impact of IC on firm performance. Wood, Holman & Stride (2006, 120) point out that there is an overconcentration on human resource practices as an assumed collective set linked to performance. These practices ought to be examined at a more specific level, and in relation to managerial orientation. The small amount of research literature found on hypothesis two, revealed also a research gap that this research intends to fill.

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3 EMPIRICAL RESEARCH

In the theoretical part of the study, literature on IC assets, KM practices, organizational performance and value creation including findings from previous research on mediation was reviewed and put together to form the basis of this study.

The empirical part of the study rests on the review.

3.1 The study method

A quantitative research method proved to be appropriate for this study. Previous research literature on the subject, and especially the chosen mediation testing model by Baron & Kenny (1986), supported, or even demanded, quantitative research. What Baron & Kenny did, was testing the statistical significance of direct and indirect effects in multiple regression analyses. In order to find out, how IC assets and KM practices impact organizational performance, both direct and indirect effects of the variables were also measured in this research.

Mediation (Figure 6.) occurs when an intervening variable M is affecting the outcome Y simultaneously with X, and the direct effect of X on outcome Y decreases (Preacher & Hayes 2008, 880). To put it simply: mediation exists when the effect of an independent variable X on a dependent variable Y is explained by an intervening variable, or a mediator M (Preacher & Hayes 2008, 879; Shrout & Bolger 2002, 422).

This means, that instead of a direct effect, there is an indirect effect or mediation effect. Path c is the controlled effect of X to Y when another variable is thought to mediate the impact.

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Figure 6. Mediation model

Baron & Kenny’s (1986) method is based on the assumption that effecting variables are normally distributed. Therefore the model can be called a normal theory approach. (Mallinckrodt, Abraham, Wei & Russell 2006, 372.) The model can also be called a causal steps strategy, because testing the mediation effect requires following sequential steps (Baron & Kenny 1986):

1) a significant correlation between the predictor variable X and the dependent variable Y must exist,

2) the predictor variable X must have a significant effect or relation to the mediating variable M,

3) the mediator variable M must have a significant effect or relation to the dependent variable Y, and

4) a previously significant correlation between the predictor variable X and the dependent variable Y must be less significant, when the mediator M and the dependent variable Y are controlled.

Some authors argue, if it is adequate for mediation to exist to only meet conditions 2 and 3, and for example Preacher & Hayes (2004, 719) question, if a more powerful strategy for testing mediation would be to assume that there is an effect to be mediated to begin with, and that the indirect effect is statistically significant. Despite of these differing views on using the model, all four steps and relations described by Baron & Kenny were tested in this Master’s thesis.

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Baron & Kenny (1986, 1177) provided excellent directions on, how to study mediation, and what needs to be understood during the process. First, separate coefficients (X, Y & M) ought to be estimated and tested using regression analyses.

Because mediation is tested with regression analysis, its basic assumptions need to be kept in mind: linear relationships, normally distributed data and homoscedasticy of the variables (Preacher, Rucker & Hayes 2007, 216). The regression analyses ought to reveal possible, but also in this case desirable, correlations. Because the predictor variable (X) is supposed to cause the mediator (M), these two variables ought to correlate. (Baron & Kenny 1986, 1177.)

Simple mediation refers to a situation, where a single mediator is effecting the outcome, or only one variable is mediating the effect (Preacher et al. 2007, 188;

Preacher & Hayes 2004, 717). This is the simplest form of mediation. These kind of simple mediation tests are very popular in research (Preacher et al. 2007, 186;

Preacher & Hayes 2004, 717). This study is also built around single mediators.

Baron & Kenny’s model define full mediation, which means that a mediator causes a full indirect effect, whereas partial, or complementary, mediation means that both direct and indirect effects exist simultaneously (Zhao, Lynch Jr. & Chen 2010, 198).

Perfect, or full, mediation holds if an independent variable has no effect on the outcome when a mediator is controlled. Complementary, or partial, mediation occurs when both the indirect path, and the direct path exist and are signiﬁcant. If the indirect effect is equal to zero, the variable cannot function as a mediator. However it is possible that one variable is a strong mediator, and another one is not.

Zhao et al. (2010, 200) have identified three patterns that are consistent with mediation and two with nonmediation. Their framework (Figure 7.) was helpful in analyzing the results. Some of their classifications overlap those in Baron & Kenny’s model.

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Figure 7. Establishing mediation and non-mediation (Zhao et al. 2010, 201).

Zhao et al. (2010, 200) found patterns of mediation to be:

a) complementary mediation, where both mediation effect and direct effect exist and point at the same direction;

b) competitive mediation, where both mediation effect and direct effect exist, but point in opposite directions, and

c) indirect-only mediation, where only a mediation effect exists.

The interaction and impact of intellectual capital assets and knowledge management practices on organizational performance

TABLE OF CONTENTS

LIST OF FIGURES

LIST OF TABLES

1 INTRODUCTION

2 THEORETICAL BACKGROUND

3 EMPIRICAL RESEARCH