Absorptive Capacity

Cohen and Levinthal (1990) defined absorptive capacity as “the ability of the firm to recognise the value of new external information,assimilate it and apply it to commercial ends” and this is the definition that has been operationalised in this research. In order to understand Absorptive Capacity at a firm level we not only need to understand the’ prior knowledge’ of the individuals involved, but also of the teams and how it is disseminated. Therefore, the communication structure

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between the firm and the external environment and also between its various units has a critical role. Additionally, the character and distribution of expertise within the firm also has a direct impact on the Absorptive Capacity of the firm. As stated previously, this research expects all the above concepts to cluster around the three distinct latent variables of INFOC, COMint and PRK on the basis of the Cohen & Levinthal definition.

The following paragraphs examine the three latent variables and their measurements. When administering the survey instrument, the questions (i.e. manifest variables) were deliberately scrambled so that respondents could not predict the sequence and logic of the questionnaire design. This was done in order to avoid any ‘fatigue’ and bias on the part of the respondent.

1, INFOC

In section 2.2.3 we cited (Davenport & Prusak, 2000) who differentiated knowledge from information. They argued that the difference lay in that, knowledge was only created after the information had been tested and validated to create new understanding. We have defined ‘information collection/collation’ in this research as “Information that is collected from or created for individuals and groups22 ". This implies that it refers to information that is collected from external sources. It also refers to the information that may be lying within an organisation albeit unutilised or untapped. This would be manifested within the firm as how proactively it searches for new types of external information (INFOC1) and has the right mechanisms/processes in place to undertake this search (INFOC2). This would also be reflected in how quickly the new information is disseminated within the organisation (INFOC3).

The character or nature of expertise of the owner/ manager could be seen as a repository of information and this is expected to have a major effect on the

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Absorptive Capacity of the firm. In essence, this character and nature of expertise is trying to measure if the firm has the requisite information to meet its present and future prospects. This research has taken the view that requiring the respondents to specify the exact nature of their expertise/information and then trying to deduce whether this expertise/ information matches the firms requirement would be difficult. Instead, it might be more feasible to look at the degree to which the respondents perceive his/her expertise/information to match the present and future requirements of the firm. INFOC4 is designed to do this. INFOC5 in turn, measures whether there were any occasions when the respondent’s expertise was not sufficient to meet the firm’s requirements.

An important prerequisite of effective Absorptive Capacity is the ability of the firm to use and apply the information collated for effective commercial ends. The definition of commercial ends could mean the design and development of new internal processes or even new products/ services. Therefore, in order to gauge how effectively the firm uses information that has been collected the research must be able to measure the changes in processes within the firm or the introduction of new products/services. This activity generally amalgamated within the ‘Information processing theory’ (Rogers et al 1999) has a long pedigree in strategic management literature dating back to the early 1960s. Minzberg calls this the ‘programming stage’ and no matter which strategic management school one follows, this is an essential prerequisite (Mintzberg & Lampel, 1999). INFOC6 looks at how the firm applies new information to improve its internal processes and operations and enhance its productivity. INFOC7 on the other hand looks at how the firm applies new information to develop new products and services to meet future needs.

As explained in section 2.3.2, the Absorptive Capacity of the firm will also be impacted by the degree and level of communication between the firm and the external environment for information gathering. The external environment of the firm comprises of customers (INFOC8), suppliers (INFOC 9) and other external

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stakeholders like shareholders and relevant government authorities (INFOC 10) who all serve as important sources of information for any forthcoming changes that the enterprise has to take into account. Appendix 2 (a) shows the exact scales and questions used to measure the INFOC construct.

2. COMint

As cited in Chapter 2, the importance of sufficient communications between the various units within the firm cannot be overstated. Communication here has been defined as the degree to which knowledge and information is transferred between various departments/units within the firm. Appendix 2(b) shows the exact scales and questions used to measure the COMint construct.

The three items that make up this dimension look at different facets. COMint1 measures whether the respondent firm actually has a policy in place to encourage internal communication. While COMint2 looks at the operational issues of making this happen, COMint3 measures whether the firm actively tries to create an enabling environment to make the dissemination of information and knowledge within the organisation possible. This construct does not look at the type of information and knowledge that is disseminated. Neither does this construct look at what level (e.g. only amongst senior managers or across all managers) this information is disseminated.

3. PRK

As stated, prior related knowledge of the firm has a direct role in ACAP. In order to understand the level of prior related knowledge it is necessary for the firm to have the required processes/mechanisms in place to measure this attribute. Prior related knowledge also refers to the tacit component of knowledge (Leonard 1998:113) and was defined as “ …that is semi conscious and unconscious knowledge held in peoples head and bodies” and is closely related to the definition of human capital “ that in the minds of individuals: knowledge, competencies, experiences, know-how “ (Skryme 2005). These ‘mental models’ have an

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important bearing on ACAP (Lane, et al 2006). In the context of the firm, these mental models are reflected in its documents and files, designs and strategies and the degree to which these reside in different members of the organisation.

While literature has asserted that this dimension should be an important determinant of ACAP, it will be interesting to see if this actually applies to microenterprises. PRK1 looks at the degree to which the responding firm actively encourages the documentation of the acquired knowledge while PRK2 looks at how much the firm relies on using IT based retrievable systems (such as databases, Intranet etc). Cohen and Levinthal (1990) specifically emphasised that the ACAP is more than just the sum total of the different individuals in the firm. However, it is obvious that having the right spread of expertise within the firm stands to naturally enhance the ACAP. Again, rather than trying to gauge the exact distribution of the expertise within the firm which would be difficult in a survey, this research tries to measure the distribution from the perspective of the respondent. PRK3 measures the degree to which the respondent is able to rely on the knowledge and expertise of other managers in the firm. Being able to rely on managers across the firm would imply that there is sufficient distribution of knowledge and expertise. PRK4 on the other hand looks at the depth and breadth of this distribution of expertise to resolve problems within the firm.

As part of this development of the ‘mental models’ it is obvious that new information will have a major role to play. PRK5 looks at how this new information is used to develop strategies to enhance customer satisfaction. Although PRK5 is about information and arguably part of the INFOC construct, it is more related to the ‘creation of models and strategies’ which is more within the purview of the PRK latent variable. That is why PRK 5 has been included in this construct. Appendix 2(c) shows the exact scales and questions used to measure the PRK construct.

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