HARNESSING THE POTENTIAL OF
SOCIAL CAPITAL FOR INCREASING
INNOVATION CAPABILITY: BENEFIT
FOR MAINTAINING
SUPPLIER-CUSTOMER RELATIONSHIP
DIAN PRIHADYANTI
Center for S&T Development Studies, Indonesian Institute of Sciences
Widya Graha Building 8th Floor, Jl. Gatot Subroto 10, Jakarta 12720, Indonesia
dian.prihadyanti@lipi.go.id
ISTI SURJANDARI
Industrial Engineering Department, Engineering Faculty, University of Indonesia UI Campuss, Depok, Indonesia 16424
isti@ie.ui.ac.id
FAUZIA DIANAWATI
Industrial Engineering Department, Engineering Faculty, University of Indonesia UI Campuss, Depok, Indonesia 16424
fauzia@ie.ui.ac.id
Abstract
Innovation has widely been regarded as one of the main drivers of economic growth in the knowledge economy. Therefore, it is important for firm to maintain its innovation capability by implementing various strategy. This paper analyze the role of social capital to absorptive capacity and innovation capability in Indonesia’s automotive companies which have supplier-customer relations. It shows that the social capital between and within the supplier-customer firms has a role in increasing innovation capability. Social capital has a role in boosting potential and realized absorptive capacity and also direct impact on the innovation capability. The similarity of the model from both companies indicates that there is a mimetic isomorphism in the innovation capability building strategy. To build the strategy, there are some condition needed as requirements.
Keywords:social capital, innovation capability, supplier-customer relationship
1. Introduction
Innovation has widely been regarded as one of the main drivers of economic growth in the knowledge economy. For firm, innovation is important to achieve and sustain its competitive advantage. In reality, the innovation activities occur at firm level. The innovation performance as the result of innovation activities is very important to gain higher business performance. Innovation performance is very depending on innovation capability. Indeed, firms are dealing with strategy to increase its innovation performance which will have an implication to the need for pursuing its innovation capability.
This paper contributes in suggesting an alternative strategy for firms to increase its innovation capability. The strategy harness the potential of social capital to increase firm’s absorptive capacity that will influence its innovation capability. The result shows that social capital has important role in increasing innovation capability. The similarity of model from both companies indicates that there is a mimetic isomorphism in the innovation capability building strategy for their human resources. It then also discuss how a supplier may gain benefit through maintaining social capital with its customer. Nevertheless, there is substantial prerequirements needed to be fullfiled in order to achieve the expected innovation performance.
2. Conceptual Framework
Innovation is an important aspect for company to gain a competitive advantage [2]. Innovation has a variety of definitions. Joseph Schumpeter is often considered to be the first economist observer of the importance of innovation. Schumpeter divided innovation into five types [3], namely the introduction of a new product or qualitative change in existing products, new processes of innovation of an industry, opening new markets, developing new sources of raw materials or other new inputs, and changes in industrial organization . At the firm level, innovation can be defined as the application of new ideas for products, processes, and activities of other firms [4]. The innovation activities may done in three level – individual, team, and organization.
OECD ―Oslo Manual splits innovation based on its novelty of implemented changes in production technology into four categories [5]:
(a) Innovation which is new to the world These occur when a firm is the first to introduce an innovation for all markets and industries, domestic and international.
(b) Innovation which is new to the market : These occur when a firm is the first to introduce the innovation in its particular market.
(c) Innovation which is new to the firm : These occur when a firm introduces a product, process or method that is new to that firm, or significantly improved by it, even if it has already been implemented by other firms.
(d) Non-Innovations: These include among other things the purchase of identical models of equipment, or minor extensions and updates to existing equipment or software.
Based on the classification, in general, a result of creative thinking will be considered as an innovation if it has been implemented or commercialized. The abstract knowledge creation or invention of new products or processes can be regarded as an innovation if it is applied to company’s activities. Therefore, it is associated with a variety of learning skills of individuals as innovation actors, who often do not realize the commercial aspect of their invention. This causes an innovation only being assessed minimumly at the company level, not by individuals who invent it. However, the actual calculation does not giving value of money but more becomes an indirect added value. This is related to other definitions set out by [6] and [7]. Damanpour [6] defines innovation from the perspective of organization as the adoption of an idea or behavior, whether a system, policy, program, device, process, product or service, that is new to the adopting organization. Jha et al. [7] defines it as a continuous improvement which is a series of activities that form a directed process to achieve performance improvement. In manufacturing, this activity mainly involves the simplification of the production process, primarily through the elimination of waste. On the other hand, radical innovations are more long-term and strategic, as well as aiming to change the key capabilities of the company to create a new paradigm. All organizations need both types of these innovations.
Innovation capability is considered to be similar with innovation potential [8]. It is formed from the interaction of different elements that include strategy, resources, processes, methods, tools, organization and culture whose interaction determines the success of innovation and success of the company as a whole. Innovation capability in an enterprise cannot be separated from the ability of employees to generate creative ideas that will be further created to the real innovation. The ability of the company's innovation is basically an accumulation of innovation capabilities of the individuals that exist in the company. Ability to obtain and use external knowledge of the individuals is very important in an innovative process that occurs [9]. Innovativeness of individuals within the company is necessary, in addition to their important role in the process of knowledge sourcing activity which is required to perform the activity of searching on the knowledge that the company needs. In this case, it is important to know who-know-what in the company, beside sources and types of external knowledge. This is important because different individuals can be a source of different types of knowledge, including intermediaries for knowledge acquisition from external parties.
simple concept as it involves various aspects of management, leadership, and technical aspects such as strategic resource allocation, market knowledge, incentives in the organization, etc.
Interaction with suppliers and other partners, may become important source of innovative ideas [5]. This can even create a concept that is really new and also new opportunities. Increased reliance in supply chain management is an indication of the importance of interaction with suppliers and other partners in order to continuously improve business performance. Related to this, company’s organization becomes more active in learning, knowledge sharing of best practices, and searching for knowledge, ideas, and new innovative approaches.
At company level, ACAP is an organization's needs related to knowledge to assimilate and to use new knowledge. At the individual level, ACAP involves cognitive and behavioral aspects of these individuals. This relates to the development of an individual's ability to use knowledge, which in this case leads to knowledge acquisition, and the ability to remember and use it. Bower and Hilgard [11] argues that new information will be received by the individual when knowledge is used in different conditions. This is related to knowledge exploitation. For individuals, learning skills become an important aspect, and therefore the transfer of learning these skills in the organization where the individual was to be decisive. In this case what happens is that knowledge transfer is also called 'learning to learn' [12]. Individuals can accumulate knowledge they have regardless of its value. In this case, usually the company has set its own top-down policy, so the innovation is happening is an innovation that are new to the firm and has not reached the new to the market or new to the world.
In regard with the definition of innovation, especially the definition by Dougherty [13], creative thinking for innovation happens at an individuals level can not be separated from the learning and problem solving skills they have. Basically, learning skills and problem solving ability has almost the same mechanism, in which they allows individuals to acquire the ability to problem-solving of issues related to his problems, and that individual will develop the knowledge he has to then be applied to solve his problems. Problem solving and learning skills has quite similar development mode, although what it learned is usually different. Learning skills include capability development to assimilate the existing knowledge, while problem solving skills describe the ability to create new knowledge.
Ellis [14] revealed that the learning sets provide a possible explanation for the phenomenon of behavior that leads to rapid problem solving. Therefore, the term creative capacity and absorptive capacity are often compared as the same proposition. Therefore, the elements of absorptive capacity at the organizational level can be analogued with absorptive capacity at the individual level. In this case, the ability to exploit external knowledge is an important component of innovation capacity, not only at the company level, but also individuals because of the ability of the company's innovation capability is basically an accumulation of individuals capability in it. Ability to evaluate and utilize outside knowledge that comes from the basic level regarding basic skills, including knowledge that develops. To understand the source of absorptive capacity, communication structure between environment and organization where an individual stay need to observed. Communication system depends on the particular actors that transfer information from the environment or may involve a less structured pattern. Background of knowledge required by individuals are also linked with effective communication.
From above explanation, it can be seen that social capital has an important role for the formation of absorptive capacity, as also said by Upadhyayula and Kumar [15]. In the social sphere, social capital can be defined as the ability of communities to work together to achieve common goals, in the various groups and organizations. In more comprehensive social capital is defined as the ability of communities to conduct the association (relation) to each other and subsequently became a very important force not only for economic life but also every other aspect of social existence. Fukuyama [16] defines social capital as a set of values or informal norms shared among members of a group that allows the establishment of cooperation between them. According to Cohen and Prusak [17], social capital is every relationship which is going on and bound by a trust, mutual understanding, and shared values, which binds members of the group to create the possibility of joint action to be done efficiently and effectively.
Some of the reference value and the element which becomes the spirit of social capital, include a participatory attitude, an attitude of mutual attention, mutual give and take, mutual confidence and trust is strengthened by the values and norms that mendukungnya. Another element with important role is community willingness to continually be proactive in maintaining good grades, forming a network of cooperation and with the creation of creations and new ideas. If this is associated with the absorptive capacity as described above, there is a relation with realized absorptive capacity that involves knowledge transformation and exploitation. From the above explanation about social capital, there is potential linkages with innovation, especially after seeing the concept of innovation and absorptive capacity which is a determinant of innovation.
and trust is often used when analyzing the impact of social capital terhdap economic growth, including innovation. Social capital is often divided into two forms, namely the structural and cognitive [19][20]. Both are often considered the most important element of social capital. Cognitive social capital includes norms and trust, while the structural social capital include social networks, both formal and informal. Norm can be viewed as a social contract or unwritten rules, for example in helping, cooperation, and subordination. Trust can be described as confidence in the reliability of another party. Informal networks are formed through interpersonal relationships between friends, colleagues, etc. Networks refer to formal participation in the group or organization. Both formal and informal networks provide support and communication channels for information exchange.
Social capital can also be divided into 6 dimensions, including groups and networks, trust, collective action and cooperation, as well as information and communication [21]. Understanding on groups and networks that allow individuals to access resources and collaborate to achieve common goals is an important part of the concept of social capital. Informal networks spontaneous, informal, and in it occurs the exchange of information and resources in the absence of specific rules, including support for cooperation, coordination, and support to help maximize the available resources. Informal networks can be formed through the horizontal and vertical relationships, and is formed also by various environmental factors. Another dimension, trust, can be divided into two elements of honesty / reliability / expectations, and fairness. The first dimension is related with belief that the other party has the expertise and ability to deliver the expected performance, while the second - fairness is the belief that the other party will give good treatment to the new conditions. The third dimension see whether individuals cooperate with other individuals. Dimensions of information and communication see whether individuals share information about issues that surround them. Measurement of social capital is still difficult, but it is possible to see, analogued, and adjust the operational elements, both at the level of society, organization or even individual.
According to Damanpour (1991) in Terviovski [22], internal communication has a relationship with innovation. Internal communication involves the communication in the development of new products, the use of e-commerce, and the sustainable development strategy, which is important for company’s performance. Angle [23] suggests that innovation capability can be improved by increasing the frequency of communication both horizontally (between sections) and vertical (inter-level managerial) within the company. It is also associated with one of the dimensions of social capital, namely the structural dimension.
Absorptive capacity is a key to the company's innovation capability [24]. Absorptive capacity is defined as the ability of companies to identify, assimilate, and exploit knowledge from the external environment [9]. Zahra and George [25] divides two absorptive capacity: potential absorptive capacity consisting of knowledge acquisition and assimilation, and realized absorptive capacity consisting of knowledge transformation and exploitation. Knowledge acquisition is the company's ability to identify and accept external knowledge, while the assimilation of knowledge related to the routines and processes that occur in companies that allow the testing, interpretation, and understanding the information obtained from external sources. Knowledge transformation is the company's ability to develop and refine routines that facilitate the combination process, whereas knowledge exploitation involves routines that enable companies to improve, expand, and enhance the existing knowledge to put it into operation.
What may determine the company's success is the company's ability to manage knowledge assets. Companies can not create knowledge without action and interaction of its employees. This indicates the importance of social capital associated with the absorptive capacity. It is also expressed by Upadhyayula and Kumar [15]. From this, social capital can be considered as factors that influence innovation. Social capital can be analyzed at many different levels, from individual asset, the community, or company. Nahapiet and Ghoshal [26] identify structural, relational, and cognitive dimensions of social capital. The structural dimension reflects the configuration of linkages and overall pattern of connections in a set of relationships. The relational dimension captures the amount of resources created and leveraged through ties, and the firm's reliance on these ties. The cognitive dimension refers to shared expectations, interpretations, and systems of meaning between firms.
formal participation in the group or organization. Both formal and informal networks provide support and communication channels for information exchange.
Many firms have experimented with supplier-customer collaborative networks, linking numerous parties in the business system, to respond to customer product and service preferences in myriad international markets [27]. The benefits of closer customer relationships may bring benefit for firms in reducing overheads and improving manufacturing efficiencies, higher sales volumes, longer-term business agreements, more accurate advance information on product requirements, etc. These benefits are outcomes of innovation. On the other hand, longterm commitment to a supplier may decrease the customer’s flexibility and responsiveness to changes in the supply or demand market if it is not well-managed.
3. Methodology
3.1.Research model and hypothesis
This paper attempts to analyzing the role of supplier-customer relationship for increasing innovation capability. Analysis is conducted by first observing the model of relationship among social capital, absorptive capacity and innovation capability by creating a structural model of the two companies with supplier-customer relationship. Further analysis is conducted to identify whether there is role of intensive interaction which determine social capital between the two companies. Innovation capability is defined as the ability to generate radical or incremental innovation, both in terms of products, processes, and management. Innovation capability is seen as the ability to continue to transform knowledge and ideas into products, processes, and systems that benefit the company and its stakeholders. Absorptive capacity reviews the potential and realized absorptive capacity, while social capital includes the dimensions of trust and social networks. Model to be used in this study are shown in Fig 1, while the variables used in this study are shown in Table 1.
Fig. 1. Research Model
The above model (Fig. 1) will prove several hypothesis:
H1a: Social capital has a positive effect on potential absorptive capacity. Social capital can have a positive influence on potential absorptive capacity. This is possible due to the existence of trust and links formed from networks of individuals within the company. They can acquire the knowledge they need either from the same or different department. They also can get it from external parties, such as acquaintances at other companies, or suppliers / customers that have been known. Therefore it can support knowledge acquisition and knowledge assimilation which are included in the potential absorptive capacity.
H1b: Social capital has a positive effect on realized absorptive capacity Social capital can also be positively related to realized absorptive capacity because social capital can make the individual within the company develop and apply the knowledge they have in accordance with the needs of companies that require creativity. These individuals can see it from the external environment and become their inspiration for creative idea. This shows its support for knowledge transformation and knowledge exploitation.
H2: Potential absorptive capacity has a positive effect on realized absorptive capacity Knowledge acquisition and knowledge assimilation can be regarded as the early steps for knowledge transformation and knowledge exploitation. Potential absorptive capacity is therefore likely to be positively related to realized absorptive capacity
H3a: Potential absorptive capacity has a positive effect on innovation capabilityRelated to the previous hypotheses, knowledge acquisition and knowledge assimilation can affect the ability of innovation, because these two aspects of potential absorptive capacity is the foundation for innovation capability. H3b: Realized absorptive capacity has a positive effect on innovation capability Related to the previous
because these two aspects of the realized absorptive capacity is the foundation for innovation capability, in addition to potential absorptive capacity.
H4: Social capital has a positive effect on innovation capability Social capital can have a positive and direct impact on the innovation capability, although it is not surpassing the establishment of ACAP, because basically the elements of social capital may be a foundation in variety of issues related to innovation, including innovation capability.
Table 1. Concept, Dimension, Operational Definition, and Elements of the Model
Variable Dimension Operational Definition Element
Social capital
Trust Belief that other parties have skill and capability to give expected performance and will give well treatment
• Number of co-worker who are willing to give expected information
• Percentage of co-worker who are beneficial to support work • Percentage of co-worker who
harness the given information as expected
Social networks All form of personal relationship or interaction either formal or nonformal to exchange
infomration, communicating, work together, coordination, and support to help maximizing available resource in the company
• Frequency of interaction with co-worker to obtain new information or knowledge
• Willingness to give support or help for other co-worker to optimize time or cost
• Frequency of delivering information or knowledge from external parties to co-worker Absorptive Capacity (ACAP)
Potential ACAP
Acquisition Intensity and speed of individuals to identify and to obtain external knowledge needed for company’s activities
• Time needed to find knowledge or information from external knowledge
• Intensity of discussion with external parties to find needed knowledge or information • Intensity to access internet to find
needed information/knowledge Potential
ACAP
Assimilation Individual ability to analyze/study earlier knowledge, synthesize knowledge, and combine external knowledge
• Number of discussion forum attended in a year to exchange experiences to improve product/process or to solve company’s problems
• Percentage of information from co-worker which is used in work • Frequency of combining available
knowledge with new knowledge Realized
ACAP
Transformation Ability of individuals to develop and improve routine which facilitates knowledge combining by knowledge obtained
• Percentage of codified knowledge that can be reused in the future • Availability of knowledge to
improve performance
• Frequency of evaluation activities to the work
Exploitation Individual capability to improve, to broaden, and to elevate present competence and create the new ones by combining obtained knowledge
• Percentage of knowledge of the worker which is used to work • Frequency of meeting to discuss
activities/project which are not
achieve minimum target/performance standard
• Frequency to find neew ways to conduct effective and efficienty work
Innovation capability
Ability to use knowledge in innovative process
• Frequency of meeting to discover ideas about new or better product • Frequency of meeting to discover
ideas about new or better process • Frequency of meeting to discover
3.2.Data collection process and analysis
In this research case studies in two companies with supplier relationship are used to explain the relationship among social capital, absorptive capacity, and innovation capability. The companies are included as the large ones in the automotive industry sector and are having a supplier relationship, where one company become a supplier, while the other is the customer. Data were collected through questionnaires with Likert scale between 1-6, and also observations and interviews. The respondents were company employees who have a minimum education level Diploma 3 (D3) and have been working for at least 1 year. This is due to the ‘knowledge content’ owned by the personals. There are 120 questionaires collected from the supplier company, while 165 are collected in the supplied company.
Besides surveying the companies’ employess through questionnaire, to deepen the analysis interviews and observations are conducted in each company. The interviewees are director and manager in the company. This is done to identify and to give deeper understanding on the activity of innovation, learning, aspects related to employee training, use of internet, communication with suppliers, customers or other external parties, the relationship between the employee (the exchange of ideas, giving support in the works), and the situation of a company meeting associated with innovation. Interviews were conducted with two respondents positioning as managers / directors of each company. The results of these interviews and observations were analyzed qualitatively and used to explain the pattern of relationship model.
4. Results and Discussion
Comparation between the two companies can be summarized in Figure 2 and 3, and Table 2 and 3. based on the output of structural equation model, the collected data has fullfill normality assumption shown by critical ration of 2.27 and 2.44. based on the estimation value for each variable, all hypothesis are proven as the P-value is lower than 0.05 (in range of 0.009 – 0.043). the cronbach alpha are also show that they are reliable shown by the value which ranging from 0.74 to 0.88.
The models and the estimation value shows that the variables have positive relationship and irreverse. The loading factor may indicate the capability of each variable to influence the other variables. Indeed, the values are still lower than 1. Therefore, the companies, especially the supplier still have opportunity to achieve higher innovation capability by increasing its social capital, allign with strengthening its absorptive capacity as mediator to achieve higher innovation capability.
Fig 3. Structural model in company B
Table 2. Goodness of fit for relationship model in Company A and company B
Index Cut off value
Company A Company B
Result Model
Evaluation
Result Model
Evaluation
Chi square Closer to 0 478.83 Marginal 524.85 Marginal
Probability ≥ 0.05 0.061 Good 0.060 Good
CMIN/DF ≤ 2.00 1.520 Good 1.550 Good
GFI ≥ 0.90 0.911 Good 0.910 Good
RMSEA ≤ 0.08 0.076 Good 0.069 Good
AGFI ≥ 0.90 0.927 Good 0.886 Good
TLI ≥ 0.90 0.930 Good 0.912 Good
CFI ≥ 0.90 0.925 Good 0.931 Good
Table 3. Result of Reliability Testing
Item Variabel Cronbach alpha for
Company A
Cronbach alpha Company B
F1 – F6 Social capital 0.736 0.706
F7 - F12 Potential ACAP 0.834 0.821
F13 – F18 Realized ACAP 0.812 0.816
The supplier company (Company A) in this study produce a dashboard as its main product. This firm is not only conducting innovation in its products, but also its production process and its managerial aspects. This company is very concern about the learning process of its employees. The company has an internal and external learning activities. It has quality control circle group for internal learning and also intensive discussion between and among departments at least once for three weeks. For learning which included external parties, the company has routine meeting with its customers and suppliers, and also seigi event which is conducted before the real product launching. There are also intensive communicatin through telephone or internet with collegua in other companies informally. This shows that there is information and knowledge transfer in formal and informal way, although the formal ones are still dominant. In these activities, the role of external parties is very important which can be seen from its dominance as the source of information and knowledge compared with other sources. This is a driving factors for company’s innovation capability considering that the company has many employees with unsupporting education background for their work.
Company B which is the customer of company A is a company that produces cars. Both company has maintain their supplier-customer relationship for almost 20 years. Company B was frequently assisting Company A in various activities concerning with improvement related with its product or process. Company B is also conducting products, processes, and managerial innovation but in higher level compared with Company A. The company has a policy to help its main supplier directly if the supplier is not able to maintain or even improve its performance. This company also has internal and external learning. The one that is different from company A is the presence of innovation team and advance training. Role of internal and external parties is almost similar as the important source of information and knowledge.
From the relational model of social capital, absorptive capacity and innovation capability in both companies, there are similarities between the two patterns, although both companies have different kind of product. The models showed the same positive influence, although with some differences in its coefficients. The influence of social capital to potential and realized absorptive capacity and also innovation capability is having higher value for the supplied company.This is similar with the conditon of the model especially in the influence of potential absorptive capacity to realized absorptive capacity and both to the innovation capability. This is possible because the supplied company is a larger company and has sufficient funds to access sources of knowledge that is wider than the company's suppliers. The supplied company is also able to hire employees with the suitable educational background and capable to support innovation activities. However, the supplier company still has a chance to improve its condition to increase its innovation capability. This is supported by the existing social capital, so its existence can be used to see the condition of other better companies and can be used as source of knowledge and information that can be imitated in accordance with the conditions of the company. This can also be done by other companies especially which already have a position in its supply chain. In addition, the suppliers can also take advantage of social capital in the form of the proximity of employees to other company employees to obtain important information and knowledge that can be used by companies to improve innovation capabilities and improve company performance. By looking at the interaction between the two companies and each company's interaction with other external parties, it appears that social capital has an important role for the company to conduct knowledge acquisition, assimilation, transformation, and exploitation that will ultimately improve the innovation ability of employees. Therefore, this may be an alternative strategy for the company to improve the innovation ability of employees.
5. Conclusions
Innovation capability can be built by utilizing social capital through well-managed close supplier-customer relationship. This is possible because the building of social capital through close supplier-supplier-customer relationship will affect the absorptive capacity, particularly the potential and realized absorptive capacity that includes knowledge acquisition, knowledge assimilation, knowledge transformation, and knowledge exploitation.
Based on the two case studies, the supplier company can imitate the innovation capability building of its customer firm. This suggests that there is existence of mimetic isomorphism. However, it cannot be easily done but requires some requirements, related with the period and intensity of interaction and also resource management models and conditions, especially human resources in the imitator company. Therefore, to achieve particular result, the immitating company must meet the requirements to gain benefit from its social capital with the customer which has a role as knowledge producers and knowledge source. Its role is very vital for the supplier because of its limited ability so that it cannot produce its own new knowledge or upgrade it to a higher level and convert it into higher level of innovation capability.
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