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Forum of Davos, Davos

Chapter 7 Proactive Management of Core Competencies, Innovation and Business Performance in a Period of Crisis: The Case of Spain

Lidia García-Zambrano , Arturo Rodríguez-Castellanos , and Jose -Domingo García-Merino

Abstract At present, it is known that intangible resources are the drivers of economic growth through innovation; intangibles have become the key resource for generating competitive advantage; what’s more, they are the fundamental source of business value. Numerous authors think that a concrete type of intangible resources, the core competencies, are the key factors that drive innovation and thus are able to be a source of competitive advantage. Nevertheless, there are few studies that analyse the relationship between investments in core competencies and business performance. For that reason, our objective is to test whether the proactive management of core competencies, through the investment into them, is translated into improved results in a period of crisis. To achieve the aim of our research, a fi eld study has been done, making telephone calls to Spanish companies’ fi nancial managers. Then, their responses and their fi nancial performance have been analysed. It was concluded that fi rms, whose managers affi rm that invest into their core competencies, have outperformed more effi ciency and a higher ROA in a period of crisis.

7.1 Introduction

Intangible resources are the only those that generate a sustained increasing of company’s value (Lev 2001 ; García-Merino et al. 2008 ), primarily through the innovation (Subramaniam and Youndt 2005 ; Lundvall and Nielsen 2007 ; Wu et al. 2007 ).

L. García-Zambrano (*) • A. Rodríguez-Castellanos • J.- D. García-Merino Facultad de Ciencias Economicas y Empresariales, Departamento Economia Financiera II , University of the Basque Country (UPV/EHU) , Avda. Lehedakari Aguirre 83 , 48015 Bilbao , Spain e-mail: lidia.garcia@ehu.es; arturo.rodriguez@ehu.es; josedomingo.garcia@ehu.es

K. Rüdiger et al. (eds.), Entrepreneurship, Innovation and Economic Crisis: Lessons for Research, Policy and Practice, DOI 10.1007/978-3-319-02384-7_7, © Springer International Publishing Switzerland 2014 59

The investment in material and fi nancial assets nowadays doesn’t allow obtaining sustainable competitive advantage, thus inside them there is no innovation capacity. Success and leadership, even in traditional industries, can now be secured only by continuous innovation, which is primarily created by investments in knowledge. Competitive advantage depends more and more on “people-embodied know-how”. Therefore, the knowledge of people in organisations has become the driving force of competitive advantages through innovation (Prahalad 1983 ). Numerous authors think that not all the intangible resources have the same importance; those that are called core competencies are the most important ones. Core competencies are the set of skills or capacities developed by the company that generate a signifi cant value or benefi t for the client (Hamel and Prahalad 1994 ). A correct management of these core competencies allows companies to obtain competitive advantages through innovation and better business results. For this, the aim of our research is to establish a relation between companies that carry out a proactive management of their core competencies through investing in them and economic performance. This is set out in the recent period; we estimate that in these circumstances, in crisis period, this relation is especially important. In order to achieve this objective a survey to the Spanish’s fi nancial managers has been done, in which they are asked about these aspects. After the analysis of the results, it is concluded that, in the recent period of crisis, Spanish companies, whose managers affi rm invest into their intangibles, have outperformed higher sales per employee, higher ROA and higher effi ciency, the ROA and effi ciency variables statistically signifi cant . The chapter is organised by the following form. In the second section, starting from the theory of resources and capabilities, the decisive role of the intangible resources and core competencies on the business competitiveness is justifi ed; afterwards, a literature review on the link between core competencies and business performance is presented, as a previous step to planning the hypothesis and sub-hypotheses of the research. In the third section, the methodology utilised in this work is raised, showing the process utilised in order to obtain the dates, and fi nishing the section showing the statistical analysis applied. In the fourth section, the obtained results are exposed and commented. To sum up, the principal conclusions got in this study are presented. 1

1 This chapter has been made inside of the Financial Valuation of Business Intangibles Research Group (VALINTE) and The Unitary of Training and Research UFI 11/51 of the University of the Basque Country, and funded partially by FESIDE Foundation (Research Project Ref. ECO200914383- C02-02), the University of the Basque Country UPV/EHU (Research Project Ref. EHU11/37) and the Basque Government (Research Project Ref. S-PC12UN018). We are grateful to the members of the Basque Management and Finance Forum for the collaboration on the treatment of questionnaire used to obtain information from the fi nancial managers about the topics analysed in this chapter.

7.2 Intangible Resources and Core Competencies as Sources of Competitive Advantage

7.2.1 The Role of Intangibles on the Business Competitiveness: The RBV

When we talk about strategic management, there exist two complementary perspectives in order to explain the differences in business performance: an approach centred in the industry, called the theory of Industrial Organization or IO (Porter 1985 ), and another based on resources, called the resource-based view or RBV (Wernerfeld 1984 ; Barney 1986 ; Hoopes et al. 2003 ; Galbreath 2004 ). Our work is based on this last approach. As a consequence, we pay special attention to business resources as major source of competitive advantage. However, not all of the resources are equalled important in order to the business success. The RBV prescribes that only resources with certain characteristics are capable of generating a favourable position against competitors. The resources that exhibit value, rareness, inimitability and non-substitutability (“VRIN requisites”) are considered “critical resources” (Wernerfeld 1984 ), “strategic factors” (Barney 1986 ), “strategic assets” (Amit and Schoemaker 1993 ), “strategic resources” (Peteraf 1993 ) or “core competences” (Hamel and Prahalad 1994 ). With rare exceptions, resources that meet the VRIN criteria are widely purported to be intangible in nature (Galbreath 2004 ). As a consequence, intangibles are those resources that more frequently become basic factors of business competitiveness, through its capacity to promote innovation inside the company (Lev 2001 ). This statement is particularly applicable to knowledge-based intangible resources, that is, intellectual capital . When we talk about intellectual capital or intangible resources, we distinguished between intangible assets and core competencies .

Intangible assets are “codifi ed” intangible resources, so that the relevant rights regarding their holding or ownership by the organisation are clearly established, by means of a contract, a regulation or any other legal title. Patents, concession rights, licences, acquired trademarks and so on are intangible assets. The core competencies are the set of skills or aptitudes developed by the company that generate a signifi cant value or benefi t for the client (Hamel and Prahalad 1994 ). Therefore, they are the sources of knowledge and activities that, by providing competitive advantage mainly through the innovation (Wu et al. 2007 ), are the determining ones when it comes to creating value. The core competencies of a company are not usually very numerous, as, in order to achieve their competitive advantage, the majority of companies focus their endeavours and internal resources on a few sources of knowledge, services or activities ( core business ).

7.2.2 Core Competencies and Business Performance: Literature Review and Proposal of Hypothesis

There are numerous papers that consider that intangibles, and investments into them, determine the profi tability of the companies. Table 7.1 shows the studies that relate the investment in intangible resources and business performance. As it can be observed, the positive relation between both factors came basically from the capacity of intangible resources to promote the innovation (R&D, employee training, organisational change, etc.). Despite the existence of a general agreement about the importance of intangible resources, there is scarce empirical evidence about whether companies that really manage proactively those intangible resources that generate competitive advantage, that is, invest into core competencies , obtain a better economic performance. This is particularly important in a period of economic crisis. Based on the above, the main hypothesis of the research work is advanced: H 1 : The fi rms which invest into their core competencies will get better results in a period of crisis. With respect to the ways of measuring fi rm’s results, we have used the ROA, but also other variables: the effi ciency (operating profi ts per employee) and sales per employee. For that, we present the following sub-hypotheses. H 1.1 : The fi rms which invest into their core competencies will get a major ROA in a period of crisis. H 1.2 : The fi rms which invest into their core competencies will be more effi cient 2 in a period of crisis. H 1.3 : The fi rms which invest into their core competencies will get greater sales per employee in a period of crisis.

7.3 Methodology

7.3.1 Selecting the Population and Obtaining the Sample

An empirical study was performed to check this hypothesis, with the results of survey to company managers combined with information on business performance obtained from a database. We have selected one population of Spanish Companies. The survey focused on companies in Spain, specifi cally on those with over ten employees and whose turnover was also over two million euros a year. Companies that did not meet these conditions were ruled out as they did not have a minimum structure and, on the other hand, there are often not suffi cient fi nancial data to be able to carry out the analysis.

2 We have defi ned the effi ciency of a company as the operating profi ts divided by the number of employees.

Table 7.1 Studies that relate the investment in intangibles and performance Measure of business’ results Main results Business results The application of the model allows to the directives know how the organisational resources must be utilised and how invest into them to generate value The study shows how the use of initiatives of organisational improvements to increase the intellectual capital has better results if they are used together than if they are used individually

Non-fi nancial measurements Business results The authors conclude by exposing a guideline in order to companies to carry out their investments and strategies to increase their business value

Intangible/core competence

Authors Type of work Marr et al. ( 2004 ) Theoretical Dimensions of IC Theoretical Dimensions of IC

White and Begley ( 2006 ) Theoretical Dimensions of IC

Grimaldi and Gricelli ( 2009 ) Market value The investment in R&D increases the value of the company

Empirical Investment in R&D Empirical Advertising Market value The investment in advertising means an engagement of the company with its employees and it is related to positive cash fl ows The relation between both variables is positive; however, the relation has not the same effect in all the companies, but it will depend on the size and the technological level of the industry

Increase of the productivity

Empirical Investment in R&D

Ravernscraft and Scherer ( 1982 ) Chauvin and ) Hirschey ( 1993 Luh and ) Chang ( 1997 (continued)

Table 7.1 (continued) Measure of business’ results Main results

Intangible/core competence

Authors Type of work ROA Workers will be more motivated, and the results of the company will increase, if the company pays more attention to its workers Productivity/ROA The investment in R&D increases the ROA and productivity of the companies Economic return The investment into the three types of IC increases the returns; there is no differences among the three continents studied (Europe, Asia and America) Economic profi t The efforts made to improve the employee training have a direct and positive effect over the companies’ profi ts Q Tobin There exists a positive relation between the investment in advertising and the value of the company Q Tobin There exists a positive and signifi cant relation between the investment in R&D and the market value of the company. It’s important to bear in mind that the result is better in small enterprises The investments in intangible resources and innovation have positive and direct effects over the business results

Results, measured through a Likert scale

Empirical Investment in employees Empirical Investment in R&D Empirical Dimensions of IC

Lee and Miller ( 1999 ) Tsai and Wang ( 2005 ) Wu and ) Chou ( 2007 Empirical Employee training

Danvila and Sastre ( 2009 ) Wang et al. ( 2009 ) Empirical Investment in advertising Empirical Investment in R&D

Parcharidis and Varsakelis ( 2010 ) Empirical Human and technological resources innovation

Fernández and Martos ( 2011 )

Table 7.2 Study technical data Population 41.776 Companies in Spain Sample 1.492 valid questionnaire to Spanish directives Technique for data collection Telephone survey Calendar 21 November 2011 to 16 December 2011 Source of fi nancial data Intertell database Economic variables ROA, effi ciency and sales per employee Final sample 1.385 Spanish companies: period 2010 Random fi nal error Random error of 2.5 %, with a level of confi dence 95 %

The initial population in Spain was 41.776. It was obtained from the SABI database. From there, a representative random sample of 1.492 companies was obtained, whose managers answered the questionnaire by means of a telephone survey. Subsequently, it was obtained the fi nancial data for Spanish companies in 2010, that is, an advance period of economic crisis. The data were extracted from the Intertell database. Thus, the sample was reduced to 1.385 companies, being a maximum error level of 2.5 % for a confi dence level of 95. Table 7.2 contains the technical datasheet of the conducted survey.

7.3.2 Research Process

In order to verify the hypothesis, the research process was organised as follows: – First of all, the answers to telephone survey conducted were collected, where the opinion of Spanish executives was gathered about different aspects relating to the importance of intangibles and the proactive management of the core competencies and the investment made into them. – Next, after collecting the opinion of the executives, information was gathered about the business performance of the companies analysed during 2010 period in

Spain. – Subsequently, in order to analyse the relation between the companies that invest into core competencies and the business performance, the data obtained were initially subject to a descriptive analysis. – Lastly, the hypothesis was tested. Given that the variables did not match normal distribution, and that the standard transformations to achieve normality were not successful, non-parametric tests, particularly the Mann–Whitney test, were performed.

7.3.3 Results

For the hypothesis of the study and its sub-hypotheses Tables 7.3 and 7.4 show the results of the descriptive analysis and the Mann–Whitney U test, respectively.