This chapter presents a review of the available literature relevant to this research. The chapter discusses trust by presenting its different concepts and definitions. Then, organizational trust is conceptualized and defined and its dimensions presented. Empirical studies related to organizational trust are then reviewed. The concepts and definitions of intellectual capital are mentioned. Followed by an explanation of its importance, the evolution in the development of intellectual capital theories, its components and finally empirical studies are reviewed. The chapter ends with an explanation of business performance, survival and competitiveness.
Trust Concept and Definition of Trust
In order to understand the role trust plays in an organization, it is important to first discuss what trust is. By nature, trust is a multidimensional concept (Barber, 1983), moreover it is intangible. Trust is also multidisciplinary; it has been studied from the fields of sociology, psychology and organizational studies. The different disciplines consider trust in their respective contexts and have related it to individual expectations, interpersonal and inter-organizational relations, economic transactions and social structures (Huotari &
Iivonen, 2004). Therefore it is difficult to define. Often, research on trust is definitionally and conceptually vague.
Although the conceptualization of trust varies, most of the research points to three basic features: a) trust is based on expectations, beliefs and interpretations, b) trust is manifested in people’s behavioral patterns and c) trust makes a difference (Huotari &
Iivonen, 2004). Each of these features will be discussed below. Concerning the first principal, trust is primarily based on the expectation of other people’s willingness and ability to fulfill ones needs and wishes (Fukuyama, 1995; Nooteboom, 2002). Mishra and Spreitzer (1998) describe trust as a dynamic construct reflecting an individual’s beliefs about person-environment relationships. Bhattacharya, Devinney and Pillutlas (1998) also establish a link between trust and expectancy and define trust as “an expectancy of positive (or non-negative) outcomes that one can receive based on the expected action of another party in an interaction characterized by uncertainty” (p.462). Organizational management literature strongly emphasizes this idea in both intra-organizational and inter-organizational relations. For
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example, Fukuyama (1995) defines trust as “…the expectation that arises within a community of regular, honest, and cooperative behavior, based on commonly shared norms, on the part of other members of that community” (p.26). Similarly, Shaw (1997) as cited by Huotari and Iivonen (2004) defines trust as “…a belief that those on whom we depend will meet our expectations of them” (p.8). Interactions then are critical, since trust develops between individuals as expectations are continuously met. It is then natural that trust is more critical between acquaintances than strangers and more significant for long-term relationships. groups. Furthermore, they assert that in an organization, trust grows out of non-opportunistic behavior and the communication process under which shared values and meanings are developed.
Finally, the third basic feature regards trust as an agent of change. The ability of trust to make a difference is primarily being emphasized in management literature. According to Huotari and Iivonen (2003), trust has several advantages such as promoting open exchange of information, knowledge and learning, facilitating economic activities and reducing transaction costs. Today’s complex and highly dynamic business environment poses a great deal of uncertainty, this has turned researcher’s attention to trust. The ability of trust to make a difference makes it crucial to the management of organizations looking to establish optimal knowledge processes, thus trust is strongly noticeable in the concept of intellectual capital.
Organizational Trust Concepts and Definitions of Organizational Trust
As with trust, the conceptualization of this term varies within the literature. However, most definitions of organizational trust describe the application of the concept of trust to the organizational context. For example, the Institute for Public Relations defines organizational trust as “the outcomes from interactions at the co-worker, team, organizational and
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organizational levels” (p.6). Similarly, Shockley-Zalabak, Ellis & Cesaria (2003) define organizational trust as the “expectations individuals have about networks of organizational relationships and behaviors” (p.37), while Gilbert and Tang (1998) characterize it as
“confidence and support in an employer” (p.322). The definition of organizational trust seems to be evolving and becoming more complex as authors try to incorporate different concepts in an attempt to obtain a more holistic concept. Shockley-Zalabak et al. (2003), in an attempt to build upon the work of Mishra, define organizational trust as:
the organization’s willingness, based upon its culture and communication behaviors in relationships and transactions, to be appropriately vulnerable based on the belief that another individual, group, or organization is competent, open and honest, concerned, reliable, and identifies with common goals, norms and values (p.4).
Because of the integration of the different elements of organizational trust, this definition was adopted for the thesis.
Dimensions of Organizational Trust
Existing literature coincides in describing organizational trust as a multidimensional construct. Empirical studies in both marketing (Swan, Trawick, Rink & Roberts,1988) and organizational studies (Bromiley & Cummings, 1993) provide empirical support for the concept of an overall trust construct composed of multiple dimensions. However different terminology is often found when stating the dimensions of trust. For example, the Institute for Public Relations (n.d.) proposes four dimension of trust, which are: integrity, commitment, dependability and competence. On the other hand, Mishra (1996) suggests four different dimensions: openness and honesty, concern for employees, reliability and competence.
Although the terminology varies, a closer review of the literature suggests an overlap in concepts (Chathoth, Mak, Jauhari & Manaktola, 2007).
This research adopted the five dimensions of organizational trust proposed by the Model of Organizational Trust, Job Satisfaction and Effectiveness by Shockley-Zalabak et al.
(2003). The model (depicted below), was used to explore the relationship between organizational trust, job satisfaction and perceived effectiveness. It is in part, based on the work of Mishra (1996) and uses the four original dimension of trust: concern for employees,
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openness and honesty, reliability and competence; plus identification, a fifth dimension contributed by the authors. A brief explanation of each dimension is offered below.
Figure 2.1. Model of Organizational Trust, Job Satisfaction and Effectiveness. Adapt from
“Measuring organizational trust: Cross-cultural survey and index,” by Shockley-Zalabak, P., Ellis, K., & Cesaria, R., 2003, IABC Research Foundation p.8.
The first dimension: concern for employees, refers to the employee’s belief that their superiors care, empathize and accept them. It also denotes a belief that their superiors are sincerely concerned about their well-being and safety (Mishra, 1996). Employees also have confidence that their bosses will not take unfair advantage of them. It is important to mention that concern for employees does not mean a lack of self-interest or a disregard for meeting organizational goals; however, it does imply a balance between self-interest, profit and the interest in the welfare of others.
The second dimension: openness and honesty, involves several aspects of communication and knowledge sharing. This dimension involves not only the amount and accuracy of information that is shared, but also how sincerely and appropriately it is communicated within the organization (Shockley-Zalabak et al., 2003). Similarities can be found between openness and honesty and integrity. The term integrity can be found in other organizational trust models as that proposed by the Institute for Public Relations. Both terms discuss honesty and truthfulness. However, integrity tends to focus more on the individual whereas openness and honesty focuses more on information sharing.
The third dimension is identification. As stated earlier, this dimension was integrated into the original model proposed by Mishra in 1996. In other models, it can be found described as commitment (Chathoth et al., 2007). The dimension of identification, as
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explained by Shockley-Zalabak et al. (2003) relates to “how individuals manage the paradox of separation and association as an organizational member” (p.40). In other words, it is the extent to which employees hold common goals, norms, values and beliefs associated with the organization’s culture. The closer the goals, norms and values of employees align to those of the organization, the stronger the sense of affiliation. Identification also indicates how connected employees feel to managers and to co-workers.
The fourth dimension of trust is reliability. Because “inconsistency between words and actions decrease trust” (McGregor, 1967, p.164) the consistency and dependability of co-workers, teams, suppliers and the organizations actions are very important. Also identified in extant literature as dependability by Chathoth et al. (2007) and consistency by Kirkpatrick &
Locke (1991) the dimension always describes regularity in behavior and following through with what is said.
The fifth and final dimension is competence. It relates to the organization’s ability to compete in the market, including the leadership qualities of the organizational members, which collectively create a perception of organizational competence or incompetence.
(Mishra, 1996; Shockley-Zalabak et al. 2003) The dimension also extends to the perception of employees on the effectiveness of co-workers and leaders. Effective co-workers and leaders translate to an effective organization with the capability to survive and lead in the marketplace.
Review of Organizational Trust Empirical Studies
Aneil K. Mishra (1996) examined the role of trust in organizational response to crisis.
Although his research centralized on organizational response to crisis, Mishra also studied the relationship between trust and organizational performance. Based on prior research and on interviews with 33 top managers, Mishra conceptualized trust into four dimensions: a) competence, b) openness, c) concern and d) reliability and hypothesized trust to be positively related to organizational performance. The results of the investigation showed a positive correlation between trust and organizational performance, supporting her hypothesis. Mishra (1996) concluded “trust in a central factor enhancing organizational performance, long-term success and survival, especially as environments have become more uncertain and competitive” (p. 25). The qualitative method adopted in the research does not provide a clear explanation of the relationship between trust and organizational performance; however, the
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importance of his work to the study of organizational trust lies in the conceptualization of the four dimensions of trust which served as a foundation for other researchers.
In 2003, Shockley-Zalabak, et al. built upon the knowledge gained from previous research, including the work of Mishra, and studied the importance of organizational trust while developing an instrument for its measurement. Results strongly supported their model indicating that concern for employees, openness and honesty, identification, reliability and competence are strong predictors of job satisfaction, which in turn influence perceptions of organizational effectiveness. A key finding of their research was evidence suggesting the five dimensions of organizational trust did not differ by geographic culture or industry type.
Finally, statistical testing of the 29-item OTI, the tool developed to measure organizational trust, reflected high reliability and validity, indicating the instrument is stable over time and internally and externally consistent.
Lee and Choi (2003) developed a research model that interconnected knowledge management factors in an attempt to fill the literature gap left by the empirical research of the time that had explored the relationship between these factors separately. The model included 7 enablers: collaboration, trust, learning, centralization, formalization, T-shaped skills and information technology support. Lee and Choi hypothesized that when relationships were high in trust people were more willing to participate in knowledge exchange. Results showed trust is a significant predictor of all knowledge creation modes and that knowledge creation is positively related with organizational performance.
Intellectual Capital Concept and Definition of Intellectual Capital
During the mid-1980’s people started noticing a gap between book value and market value in several companies. Looking to explain this phenomenon, John Kenneth Galbraith, a Canadian-American economist, developed the concept of “intellectual capital”. From this point on, and as traditional accounting measures became inadequate to determine the real value of a company, the importance of valuing IC became vital to determining an organizations exact corporate value. Numerous scholars have contributed and analyzed the role and relevance of IC in the performance and value creation capability of organizations (Maditinos et al., 2010).
According to Tseng and Goo (2005) the literature is still lacking a common and clear definition that appropriately describes the term of IC. Edvinsson (1997) explains IC as the
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knowledge, skills and technologies that create a competitive advantage and therefore, financial gains. Olve et al. (1999) considers IC as a market premium while Bontis (1998) refer to it as the result of effective experience and knowledge against the company’s data.
Stewart (1997) defines IC as “the intellectual material-knowledge information, intellectual property, experience- that can be put to use to create wealth” (p.64). Even though there are differences in the conceptualization of IC two basic characteristics can be identified throughout the literature: it is intangible and it creates value within an organization.
The Importance of IC
Today’s global markets is moving organizations towards knowledge and technological innovation in an effort to gain a competitive advantage in today’s cut-throat, highly-competitive global economy. The role of IC in creating value has become crucial for organizations to obtain a competitive advantage in the marketplace (Usoff, Thibodeau &
Burnaby, 2002). The importance of IC has been described by numerous authors. For example, Drucker (1995) stated “knowledge has become the key economic resource and the dominant-and perhaps even the only-source of comparative advantage.” (p.54) His idea is supported by Bontis (1998) who mentions “…firms that are thriving in the new strategic environment see themselves as learning organizations pursuing the objective of continuous improvement in their knowledge assets” (p.64). Antal et al. as cited by Bontis (1998) goes even further and boldly declares “organizations that have been unable to enhance their knowledge assets have failed to survive and are left wondering what the fuss is all about”
(p.64).
The Development of IC Theories
Since the beginning of the IC movement, scholars have developed theories and models to aid in its evaluation and measurement. In 1986 Karl-Erik Sveiby, often described as one of the “founding fathers” of knowledge management, published his first book titled The Know-How Company. In his work, he explores how to manage the rapidly growing
“knowledge companies” and addresses the dimensions of human capital in IC. A year later, Itami and Rhehl published their work title Mobilizing Invisible Assets. In it, the authors described the effect of invisible assets on the management of Japanese companies. Both of these studies initiated an interest in employee knowledge and experience that would be later further developed by scholars.
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Both theoretical and empirical research on the intangible assets of organizations began to emerge. Lev and Sougiannis (1996) valued and calculated intangibles and then correlated those values with financial measures. Inspired by Sveiby’s concepts, Edvinsson and Malone (1997) identified the intangible assets of a company and re-labeled them as IC. In 1998 Bontis associated IC with business performance and in 2000 Bontis et al. further supported their original findings by positively associating human, customer and structural capital with business performance in both service and non-service organizations. Chen et. al (2004) also observed there is an important association between IC and business performance.
Furthermore, they found a significant relationship among the elements of IC. Finally, Tseng and Goo (2005) explored the relationship between the elements of IC and corporate value and found a positive relationship exists between these variables.
Components of IC
IC does not exist isolated; it is made up of various components. Several models of IC can be found in the literature allocating IC into different categories. For example, Bontis (1998) divides IC into a) human capital, b) structural capital and c) customer capital. Chen et al. (2004) divides it into a) human capital, b) structural capital, c) innovation capital and d) customer capital. The classification of IC varies depending on the researcher however, as pointed out by Cabrita and Bontis (2008) contemporary research seems to have adopted a common tri-partite dimension as can be observed in Table 1.1.
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Note. HC represents human capital; OC represents organizational capital; CC represents customer capital; SC represents structure capital; InC represents innovation capital; PC represents process capital; RC represents rational capital.
Skandia AFS is Sweden’s largest insurance company. It is recognized as one of the first companies to work with their IC (Bontis, 2001). Leif Edvinsson, director of Intellectual Capital developed the Navigator, a dynamic and holistic IC model. This model can also be found in the literature with the name of Skandia’s model, Skandia’s value distinction tree or Skandia Navigator. For the purpose of this study, the IC components proposed in this model were adopted and are described below.
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Figure 2.2. The Navigator. Adapt from “Developing Intellectual Capital at Skandia,” by L.
Edvinsson, 1997, Long Range Planning, 30(3), p.226-373.
Human Capital (HC) “represents the individual knowledge asset of a company’s employees” (Maditinos et al., 2010, p. 5). It refers to employee’s tacit knowledge, skills, capability and attitudes. The essence of human capital is the sheer intelligence of the organizational members. It embodies the knowledge, talent and experience of an employee.
Defined from the individual’s level, it is the combination of genetic inheritance, education, experience and attitudes about life and business of the organizational member (Bontis & Fitz-enz, 2002). Employees generate IC through their competency and attitudes. Organizational performance is enabled by HC as employees develop products and services that customers are willing to pay for yielding a profit for the company. Even though employees are considered the most important corporate asset in a learning organization, this asset is not owned by them, therefore if an employee does not serve the company with his/her brainpower that asset cannot be converted into market value (Chen et al., 2004).
Organizational capital (OC) incorporates: work-force training, employee voice and work design. Training that takes place within the organization is an important component of OC. “Work-place training is a joint decision undertaken by the worker and the firm to invest in additional skills training after an employment relationship has begun. This training raises the productive capacity of a company” (Chen et al., 2004). Employee voice integrates the organizational structures that give workers, especially those in non-managerial positions, input in the decision making processes. Practices associated with employee voice vary and can range from a simple employee suggestion box to more elaborate schemes as a formal
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complaint resolution system (Ichniowski, 1990). Work design refers to processes set up within the organization which will allow a more flexible allocation and re-allocation of employees in order to respond to changing environmental factors. Flexible organizational structures that enable rapid reengineering efforts, job rotation and job sharing are examples of such practices (Chen et al., 2004).
Customer capital (CC) is the knowledge that develops through the customer-supplier relationship when business is conducted. Bontis (1998) represents CC as any potentials of the company regarding its customers. According to Chen et al. (2004) CC acts as a bridge and a catalyst in the operations of IC. CC is most directly related to a company’s business performance because without it market value and consequently organizational performance cannot be achieved. CC relies on the support of HC, SC and InC.
Structure Capital (SC) holds “all the non-human storehouses of knowledge in organizations, which include the databases, organizational charts, process manuals, strategies, routines and anything whose value to the company is higher than its material value” (Bontis, 1998, p.92). Chen et al. (2004) states that “SC and HC enable enterprises to form, develop, and use IC and CP in a coordinated way” (p.9). It is synthesized into the knowledge management system (KMS) that retains packages and moves knowledge within the organization. According to Bontis (1998) SC contains “elements of efficiency, transaction time, procedural innovativeness and access to information for codification into knowledge, it also supports elements of cost minimization and profit maximization per employee” (p.66).
SC helps employees optimize intellectual performance and therefore has the potential to improve business performance. However, if a company has a poor KMS it will not have a positive impact on performance.
Innovation capital (InnC) is defined as the ability to build previous knowledge and generate new knowledge. Innovation can be technological or organizational. It is the
Innovation capital (InnC) is defined as the ability to build previous knowledge and generate new knowledge. Innovation can be technological or organizational. It is the